^lOSANCElfj}> -^HIBRARYQc. "^aaAiNdJW^^ %ojnv3jo^ AWfUKIVERJ-//, ^TiUOKVSOl^ o r tr^ cs > -< ^/ywAiNn-3ViV^ ^OFCAllFOi?^ ^OFCAIIFO% fiS .^MEUNIVERS'/A &AllVII8n:l^'^ .>:10SANCEI^^ o .^r >^tlIBRA'r ^^l•lIBRARYa^ ^^:OFCAllFO% ^OFCAlIF0/?/(^^ ^^AavaaiH^ " ^<:/Aavaan-# .^ME•UNIVER£/A %UQNVSO# ,^WEIJNIVER%. "^J'ilJDNVSOl^ "^JJliONVSOl^^ V/^aaAIN(l-3WV' ^ ^^Abvaaii-iv^ ^illBRARYQ^ j(:^mm\o/'^ o ^^mmyi^^ ^^Hm\m\^^ v/ _ 1^ ^OFCAllFOff^ AWFUNIVERS//^ ^lOSANCFlfj> '"^C'AHVyflniN'^'^ %a3AiNn-3WV^ ^lOSANCEl^f^ %avjian-^^ ^^i^^i^^^^^ ^mmm"^ '%a3AiNn3WV^ HEARINGS AND ARGUMENTS BKFORK THK COMMITTEE ON BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES ON PROPOSED CURRENCY LEGISLATION SIXTIETH CONGRESS 1907-8 WASHINGTON GOVERNMENT PRINTING OFFICE 1908 \ COMMITTEE ON BANKING AND CURRENCY. SIXTIETH CONGRESS. CHARLES N. FOWLER, N. J., Chairman. GEORGE W. PRINCE, ILL. LLEWELLYN POWERS, ME. HENRY -McMORRAN, MICH. CAPELL L. WEEMS, OHIO. GEORGE D. Mccreary, pa. GEORGE E. WALDO, N. Y. everts a. HAYES, CAL. JOHN W. WEEKS, MASS. THEODORE E. BURTON, OHIO. JAMES McKINNEY, ILL. CYRUS DUREY, N. Y. ELIJAH B. LEWIS, GA. ARSi:NE P. PUJO, LA. CARTER GLASS, VA. OSCAR W. GILLESPIE, TEX. OLLIE M. JAMES, KY. WILLIAM T. CRAWFORD, N. C. JOHN G. McHENRY, PA. CHAS. S. GREENWOOD, aeik. CONTENTS 12. Page. J^ Statement of the Hon. George F. Burgess, a Representative from Texas 5 Statement of the Hon. E. L. Fulton, a Representative from Oklahoma 23 ^Statement of Mr. A. N. Jordan, of New York City 30 ••^Statement of Mr. Frank Miller, of San Francisco, Cal 54 (Sfstatement of Mr. T. C. Daniel, of Virginia 55 !IjStatement of Mr. Samuel Gompers, President American Federation of Labor, Washington, D. C 72 . Statement of Mr. W. V. Cox (American Bankers' Association), of Washington, :^' D.C - 81,131 'OjStatement of Mr. John L. Hamilton (American Bankers' Association), of "^ Hoopeston, 111 86 Statement of Mr. J. Howard Cowperthwait, 154 West Eighty-sixth street, New 2 York City 134 o Statement of the Hon. William C. Lovering, a Representative from Massa- ^ chusetts 150 Statement of Mr. Edmund D. Fisher, secretary of the Flatbush Trust Com- pany, of New York 158 Statement of Mr. Moreton Frewen, of England 171 ! Statement of the Hon. Lyman J. Gage, ex-Secretary of the United States ()i Treasury 184 , Statement of Mr. Charles A. Conant, of New York City 205 Statement of Mr. Joseph French Johnson, dean of the New York University, School of Commerce 226 Statement of Mr. Andrew J. Frame, Waukesha, Wis 235 3 389380 Committee on Banking and Currency. House of Representatives, Washington^ D. G,^ Wednesday^ Jamuiry 22, 1908. \i The committee met at 10.30 o'clock a. m. Present: Representatives Fowler (chairman). Prince. Powers, Mc- li^Iorran, McCreary, Waldo, Hayes, Weeks. Burton, McKinney, Lewis, '*iijo. Glass, Gillespie, James, Crawford, and McHenry. Present, also, Hon. George F. Burgess, Representative from Texas, [,nd Hon. E. L. Fulton, Representative from Oklahoma. (The committee thereupon proceeded to the consideration of the Various bills pending before it dealing with financial questions.) |STATEMENT OF HON. GEORGE F. BURGESS, REPRESENTATIVE I FROM TEXAS. ;> \ Mr. Burgess. Mr. Chairman, I have pending before this committee ^i a banking and currency commission bill, H. R. 9180, to provide for the -^ creation of a banking and currency commission, directing its inves- ^ tigation, and report to the next session of this Congress, and for other purposes, and I wish to address myself briefly and strictly to it. The Chairman. What bill is it? - Mr. Burgess. It is a bill to create a banking and currency commis- I sion, which shall report to Congress not later than December 1 of this year. The Chairman. What is the number of the bill, Mr. Burgess ? ^ Mr. Burgess. I can not carry those numbers in my head to save my ]' life. I will state the substance of it, so that it will not be necessary for you gentlemen to read it. It provides, in brief, that the President shall appoint a banking and currency commission of nine members — two from the Eastern States, two from the Middle Western States, two from the Southern States, two from the rest of the country, and c>ne from the Republic at large. It defines briefly the duties of the commission, one of which is to have public hearings of not less than three days each at the cities of New York, Chicago, St. Louis, Denver. Fort Worth, New Orleans, and Atlanta. It provides that a stenographic report of those hear- ings, and such others as they may see fit to have, under regulations and rules to be prescribed by the commission, shall be filed with the Clerk of the House not later than December 1. 1908; and also that not later than that date the commission shall file a report and recommen- dation to Congress as to the best banking and currency system they are able to devise as the result of these hearings and the study of the question. My reasons for that procedure I wish briefly to give. I have heard but two objections to that method of procedure. One is that it is a 6 CUERENCY LEGISLATION. confession of our ignorance and incompetency to deal with the ques- tion. I do not care to discuss that at length. I dismiss it with the brief remark that so far as I am able to discover nobody can be hurt by a confession of the truth. If there is any great subject pending in this country about which ignorance is dense and universal, even among those who are directly dealing with it, it is banking and cur- rency. The reason for it is rather obvious. In the first place, we have never had any general discussion of the subject all over the country. We have never had that; and I hope — and that is one of the objects of my bill — that it can be kept out of partisan politics. Fortunately, it has not yet gotten into partisan politics. It is purely a great business question. I find, in talking with bankers who have been pursuing the business under existing law for all the way from ten to twenty-five years, that all they know about banking and cur- rency is such knowledge of the laws that exist as it is absolutely essential for them to have in order to run the business. The rest of their time they have given to the practical details of banking, in an effort to make money under this system, without any study of the system or its defects or advantages. I have yet to find one of those bankers who knows anything of the banking and currency systems of Germany, France, England, or any of the great progressive countries that, in my judgment, are out of sight ahead of us on this question. I have yet to find a Member of Congress who pretends to understand the banking and currency sys- tem of any country, his own or any other. I do not believe there are five men in the House that agree about any sort of a banking and cur- rency system. It would seem perfectly clear that with this dense and universal ignorance among the people pursuing the business, and among Senators and Members of Congress themselves, and with a thousand diverse views about it, a present system that is nothing but a piece of mingled ignorance, demagogy, and temporization, we wdll not be able to pass any sort of banking and currency measure of which any of us could possibly be proud in the coming years; and, in my judgment, it is certain that if we attempt it at this session the whole subject will be drawn into the vortex of partisan politics at the most unfortunate stage in the political history of this country for the last twelve years. We all understand how the parties are all divided now about every- thing under the sun, from police courts to States' rights, from the control of railroads to the control of quarantine, and all along the line. We are all divided ; the whole thing is hopelessly mixed up, and nobody can tell what is going to happen in the next Presidential election in either party. If you drag financial legislation or the banking and currency sys- tem into the coming Congressional, Senatorial, and Presidential con- tests, nobody can tell what will happen. It is absolutely certain, in my judgment, that it will only hurt the question and obscure it and get partisan prejudice and sectional feeling all mixed up with a great business question and render its ultimate solution infinitely more difficult. If this bill (hat I propose could be adopted, it would at once lift the whole subject out of the domain of partisan politics, and every sensi- ble man in every party could say, " Now, let us study this question ; we will run our Presidential and Congressional campaigns outside of CUERENCY LEGISLATION. 7 it, and we will study this question, and we will see what can be done in the interest of the whole country, without reference to party and without reference to section;" and that is exactly what ought to be done. I am not afraid, and I do not see any use in any of us being afraid, to tell the truth about our own ignorance and incapacity on this sub- ject. I am frank to admit it myself and I am ready to admit it for almost every colleague of mine with whom I have talked. [Laughter.] The Chairman. Confession is good for the soul. Mr. Burgess. Yes, sir; and good for the country, too. I think perhaps our constituents would have more faith in us if we did not claim to know everything about everything all the time. [Laughter.] If we admitted to them once in a while that we were not as smart as they thought we ought to be, I think perhaps it would be beneficial to all of us. [Laughter.] Another thing : We are here, if we attempt to legislate, as financial doctors. The chief trouble about medicine is not because of disagree- ment as to different remedies — not at all. Great physicians agree about remedial courses in the main. The disagreement arises about the diagnosis, about what is the matter with the fellow. Now, if anybody has found anybody that has offered anything like even a partially reasonable diagnosis of the causes which have produced the present situation, I would like to have his picture. One gentleman, eminent in Republican politics, masterly in ability, and dauntless in fight, who challenges my admiration, although I can agree to hardly anything that he has said so far that I have read [Senator Foraker], says that this whole thing is just " Bryan, Roose- velt, and raid on the railroads." Well, I think there is something in that — just a little. It is unquestionably true that to attempt to regu- late billions of dollars' worth of property by affecting the income, which would affect the bonds, would necessarily have a tendency to depress the value of those securities, and especially those that had been speculatively boosted ; although I have but little concern, and I presume very few honest men have much concern, about that feature. But that is only one small thing. Another man says : "Wall street speculation is the only cause for all this trouble. The gamblers tied up all the banks, and " (if you will excuse an emphatic Texas expression) " they raised all the hell." Well, I think there is something in that — just how much I do not know, and I do not think anybody else knows. But certainly that can not have been even the chief cause, let alone the whole cause of this trouble. Another man comes along and says : "All of our reserves are tied up in the money centers, and those fellows have shrewdly taken ad- vantage of the situation ; the men who owned a lot of ready deposits in gold have taken them out and put them in their safe-deposit boxes, not for fear of losing their deposits, but in order to help scare the country and play bears, and then use their money for their own ad- vantage afterwards." I think there is a good deal in that; just how much I do not know. Another one says : " It was a strife among the bears and bulls over stocks and bonds generally — not so much speculatively, but competi- tively with the different systems — Harriman against somebody, and 8 CURRENCY LEGISLATIO^r. somebody against Harriman." I think there is something in that; just how much I do not know — nobody else knows. Another one says : " We have been living too high. We have been spending too much money. We have gotten extravagant. We are buying too much from everybody and paying too much for every- thing." I think there is a good deal in that, too — a good deal in that. Just how much I do not know. Another one says : " We have been investing too rapidly. We have gone beyond a reasonable credit basis, based upon our actual cash and property situation." I think there is a good deal in that — a good deal in that. How much I do not know. If I were to be asked to diagnose and size up the whole situation as I see it — and I admit that this is only a general guess at it — I should say that the country for ten years has been going through a protracted prosperity spree, and the sobering-up process was inevita- ble. You can not cure the condition by any sort of legislation you may pass. The man is a demagogue who says you can. That is my honest opinion. You can not cure this situation by any kind of a salve that can be fixed up here by legislative doctors and spread over the sores that exist. That is my notion about it. I think we have got to go through a sobering-up, shake-out process. In a general way, my idea is that there is something in all these things as correlated and acting in accord under a general condition which, in a way, is re- sponsible for the whole trouble. All of us recognize that for the last twelve years two things have been constantly going on, tending tremendously to affect values and incite investment and extend credit unduly, namely, we have had an increasing volume of exports over imports going on steadily for about twelve j^ears, so that in that period the balance of trade in our favor has, in round numbers, been about $4,000,000,000. Cooperating with that, we have been steadily pouring into our money volume hundreds of millions of dollars of increased circulation of gold, gold certificates, national-bank notes, even of silver coinage, of every form of money, and all of it good. There has been no question dur- ing this time, or any period of this time, as to whether one dollar would be as good as any other dollar, and whether it would be a silver or a gold price, or a rag-money price, or anything else. Naturally, that could have but one effect — to cause a general rise in prices everywhere ; and it was the bull era. Everybody figured in this wa}' : " If I can buy anything now at a fair value, it is a cinch that I am going to make money, because the price is going up all th^ . time. I don't care whether it is land, or cattle, or goats, or what- ever else it is, if I can buy it now I can make money, and I do not need much money either." Confidence was so broad and widespread, so artistically boosted by my Republican friends, that the whole country was about to believe that nothing unfortunate could happen if we had a Republican Administration ; it would just be impos- sible to have any trouble. [Laughter.] And the most of the people foolish]}* believed in that. I believe some of the people who have been taught to believe it themselves got caught in this swirl. I have no doubt of it. The whole country was boosted. Everybody got to believing that a panic could not occur; that everybody was going to get rich, and if a fellow did not get rich there was nobody to blame but himself; he was just "no account;" and they went to CURRENCY LEGISLATION. 9 buying everything, and inflated credit beyond all conceivable limits — inflated all values beyond all just relations. Value is a mere crea- ture of relation, as everybody knows who knows an3'thing worth knowing about the money question or the banking and currency question. The whole thing resolves itself into a question of rela- tion ; and whenever j^ou distend the relation of credits and values to the actual, practical working basis of all the property and all the business of the country you may look for a panic, because nothing else can happen. There must be a readjustment. It is just like the inexorable working of the law of the tides or any of the great natural forces. In my judgment that is exactly what happened. Now, gentlemen may think, if they do not say, " If that theory is true, we do not need any legislation at all ; and what is the use of this banking and cur- rency commision?" I have not quite gotten to that position, but I am very much nearer to it than some people are. I do not believe that the wisdom of a Solomon, under our conditions — growing, de- veloping along all lines of progress as no other country has grown or perhaps ever will in the history of the world — can devise a banking and currency system, or a coinage system, or both combined, that will absolutely prohibit in this country the recurrence of panics of greater or less force, dependent upon conditions. I think the best that can be done is to de\ise a banking system that will prevent panics to the greatest extent that it is possible for legislation to prevent these things. In other words, I believe that an adequate banking and cur- rency system can not prevent recurrent periods of inflation and de- pression, can not prevent a readjustment now and then of distended and extended credits and values, but that it can lessen largely the force of the shock when it comes. I believe that is the best that we can hope to accomplish. And the only reason, in my judgment, for entering into this matter is not with the hope of now curing any- thing, not with the hope of immediately restoring confidence, for, in my judgment, you can no more legislate confidence into people than you can righteousness or sobriety or honesty or virtue. It is some- thing that grows out of relations and conditions, and that people exercise for themselves, in spite of your legislation. But you could provide a system, in my judgment (if you could do it by a method that would reach a common result) that would be generally accepted in the countrj^, which is the important thing; be- cause confidence Avill work then as it does in the case of every other great business proposition, which would largely prevent the recur- rence of panics. And I am much interested in that in a nonpartisan way, for it is my belief that just as soon as we go through this shake- out process and get on our feet, and confidence flows into men's hearts again (as it will, undoubtedly), we will have another period of per- haps ten or twelve years in which the same thing will go on by leaps and bounds, perhaps to a greater extent than it has in the last ten years. I see no reason on earth why it should not. People in the Northwest have not quit raising wheat; people in the South have not quit raising cotton: cattle still grow all over this country; the fac- tories are still here; the people are still here; industry, intelligence, and economy are still here, and economy and industry are increasing rapidly under present conditions; and it is certain, in my judgment, that this so-called panic is going to prove a blessing in disguise to 10 CURRENCY LEGISLATION. this great countiy. It is bound to. We will haA'e a more intelligent conception of conditions; we will have a better conception of the relation of values and credits ; we will have more intelligent and wise and conservative banking, which is one of the main things; and we will have the same great forces to operate and cooperate to produce another era of rising prices and of universal progTess. And who is President or who runs the politics of a country will not matter much. I have never been much of a believer mj^self in teaching the people all the time that prosperity and progress depend on political power. I have a contempt for that sort of doctrine. I do not care whether it comes from a Republican or a Democrat, I do not believe there is much in it. I think that progress and growth and evolution and power in this country are not going to grow out of politics, but are going to grow out of individual energy and intelligence cooperating with the great natural forces that exist here, and that will be irresistible, no matter who is in power politically. Mr. Crawford. In other words, you believe it will happen in spite of politics? Mr. Burgess. Surely; just as I believe this country has prospered beyond an^^body's expectations, in spite of the Eepublican party. [Laughter.] I think they have done what they could to prevent it, along many lines; but we are going on just the same, and very likely the Republicans would think the same thing if we had been on top and this had all happened. The truth of it is, we may as well quit, all of us. playing this demagogue game that one party means adver- sity and another prosperity. That is all tommy rot, and all of us know it in our hearts. That is the truth about it. Just a word more about this important feature: My service in Congress has grown exceedingly pleasant, especially on the personal side. I have made many friendships here, without any reference whatever to politics; for I have a contempt for a man's friendship that is grounded on either religion or politics. There is nothing sincere or valuable about it; and whenever a crisis comes it will van- ish into thin air. Mr. James. It grows more pleasant at each recurring election. [Laughter.] Mr. McKiNNEY. At each increase of salary, too. Mr. Burgess. Yes. I have formed many of those friendships that will last through life. I came here a pretty narrow, intense Democrat. I rather had the idea that a Republican, for instance, like my good friend from Maine over there, with whom I served in the first committee of Congress I got on, really, if closely inspected, had horns in his hair [laughter] ; and I had an idea that everything ought to be settled by my own party, and that the Republican party ought not to have anything to do with anything, and that the whole country was ruined if they did. Now, in principle I am a better Democrat, in my judgment, than I have ever been; but I am far less partisan. I have radically changed in this view of statesmanship and politics. Instead of believing that every issue ought to be at once drawn into the maelstrom of partisan politics, my view is that as long as it is possible every issue, and especially every business question, ought to be kept out of the domain of politics; and that we get a better settlement of questions when we all cooperate to- gether upon broad-gauge, patriotic, nonsectional, nonpartisan lines CURRENCY LEGISLATION. 11 than we do in any other conceivable way. And I am extremely anxious that this great question, which I think involves much of the future of the country, shall be settled in that way. For while I believe, as I have said, that the country will be prosperous again in another period, if we could have a sensible, broad-gauge, businesslike revision of our whole banking and currency system, making it adapt- able to all sections and all conditions, and putting it beyond the control of any section or any State, I believe that when that era comes it will be longer maintained and more universally beneficial than it would be without such action. I have an infinite faith in the patriotism and wisdom of the American people when you do not stir them up on sectional or partisan lines; and when you do I have not much faith in what is done. North or south, east or west, they are all much alike. Wlien you get them stirred up they run off on their traditional tangents— always wrong, no matter which section it is. We are all the product of environment. If I had been raised in Illinois, and run when I was a young man with Abraham Lincoln, I w^ould have thought he knew it all and was the greatest and best man in the country, and that Jeff Davis and Robert E. Lee were simply nothing. It is very natural, as it is, that I think rather the converse, having been raised down in the other section. [Laughter.] That is all there is about it, and that is the principle we go on all the way around. Banking is a colorable business. It takes color from its environ- ment. It has to. Banks which are in manufacturing sections, banks which are in cotton sections, banks which are in wheat sections, banks which are in mining sections, banks which are in cattle sections, banks which are in lumber sections necessarily partake of the business situ- ation and conditions with which they must locally deal. And so if we have a general, comprehensive system all these elements must be brought into cooperation and not forced into antagonism, to the injury of all. Now, Mr. Chairman, I think highly of what the bankers have done. But, unfortunately, and I think in the main unwisely, too, and unfairly, the banker as a rule bears about the same relation to the populace that the railroad magnate does, The}?^ look on him with suspicion. They suspect that he has a rabbit foot in every pocket, and that he wants a scheme by which they will be further milked in his individual interest. So that the country is prepared to discount at the start any recommendation from the bankers' associations. They look on them something like the good prohibition people would look upon a recommendation of the brewers' associations. [Laughter.] How can all this be avoided? Can it be avoided in any better way than by having a nonpartisan, nonsectional commission appointed by the President which will bring into cooperation nine of the ablest and best men of this country ? No President of the United States would dare, or would desire, as far as that is concerned, to do anji:hing else under this sort of a bill than to attempt to pick two of the very best men in character and capacity that each section could furnish to put on this commission. Hearings are provided for in all the great centers that touch the different great industries of the country — New York, which would reach all of New England and all of the manu- facturing and stock-jobbing centers; Chicago, which would touch all the great wheat and northwest lumber interests ; St. Louis, which 12 CURRENCY LEGISLATION. would reach all the great corn section and agricultural section of the countr}' ; Denver, which would reach all the great mining section ; Fort "\Yorth. which would reach the greatest cattle section in the world — the whole thing is cow business out there. [Laughter.] AVhy, if all the cowmen " lay down " on my friend Gillespie he would not get a hatful of votes. They run that section down there ; and if this commission is created I would like my friend Gillespie's town put in, for I think it would help him. I hope those felloAvs will not beat him. They will make a great mistake if they do; but. then, people do fool things sometimes. [Laughter.] I have been threatened myself occa- sionally. And hearings are also provided for in Xew Orleans, which touches the great sugar and rice industries, and in Atlanta, which is in the heart of the cotton countr.v and the cotton-mill country. You ma}^ say: "We can have hearings here. ^Ve are not a lot of in- competents." Well, I do not know about that. [Laughter.] I do not want to reflect on anybody. I have made confession for myself. If any of you gentlemen agree with me, I will not require you to speak out now. I have no authority to do so. But what will your hearings amount to? What do these hearings ordinarily amount to in com- mittee? You and I, who come here. know. It is a cinch that the fel- low that wants a favorite scheme of his adopted, and has a lot of money with which to pay his way and his hotel bills, will be here. That is a cinch. But who represents these great interests all around the country? ^^liat will the hearings amount to, except to give some partial view, and what approbation on the part of people will they bring? That is the real question. This is a representative Govern- ment. If the people want rag money or anj^ other kind of money, or any other sort of banking system, they are entitled to it. That is the truth about it ; and we ought to attempt to give them what they want. "\Aliy, I have no more intelligent idea about what sort of a banking and currency system the intelligent people of mj district want than a goat. Have you any idea what your people want, or anybody else? You may say : " We can give them what we think they ought to have, and then invite their approval." I will tell you what you will find as the result of that. A few broad-gauge, courageous men, with the real elements of leadership, perhaps to the number of about fifteen in the House (and it is doubtful just who of us would be in that class, and I will not discuss that at all) . would be willing to proceed on that basis. But you and I know that the average Member of Congi'css would at once get his ear to the ground and would be disposed to " head up " in his vote and in his views the way that would maintain that sympathetic, telephonic communication between him and his con- stituents, and preserve the continuity of office so dear to his heart. Mr. Weeks. Mr, Chairman, I would like to ask jSIr. Burgess if he thinks that the people of his district or any other district Icnow what they want? Mr. Bfrgess. I do not. That is exactly my contention ; and it is natural that they should not, because there has never been any public discussion of this great question. If you gentlemen will remember, we had the Monetary Commission The CnAiR:srAN. Right on that point. Mr. Weeks. I will state that you asked the question I have been hoping Mr. Burgess wouhl antici- pate, or that somebody would ask. Can those people tell you what they ought to have? CURRENCY LEGISLATION. 13 Mr. Burgess. I think so, Mr. Chairman. The Chairman. How can they tell you anything about the eco- nomic laws that control or the principles of banking, the men that are in the cotton business, or the men that are in the cattle business, or the men that are in the wheat business ? How can they necessarily tell 3'ou anything about Mr. Burgess's bill ? Mr. Burgess. I will tell you. I think there is an almost universal popular misconception of mankind as to the difference in judgment between men. It does not grow out of difference in capacity so much as it does out of difference in information. The Chairman. Let me ask you another question, and then you can complete your remarks. Mr. Burgess. Very well. The Chairman. In other words, suppose that in 1895 or 1896 such a commission had asked about gold and silver in the United States — nine-tenths of the people would have said : "We want free silver " or " both gold and silver," would they not ? Mr. Burgess. I expect so. The Chairman. Go on, now; I simply wanted to illustrate the point. Mr. Burgess. I expect so. The Chairman. But after the discussion they knew more. Mr. Burgess. Now let me give you my idea; and that is exactly what I am trying to provide for in this bill. I am trying to provide for the local dissemination of knowledge, and a local discussion among all sections of this very problem ; because I believe that when- ever you get the whole people to study a question, independent of sectionalism and partisan politics — which tended to obscure the money question, as we all know — then you will get finally an over- whelming cooperation along sensible lines. I believe that the com- mon people have more capacity than we are wont to think. My experience as a lawyer has been this: Take twelve honest farmers who never read the Constitution, and they do not have to have gone through a law school to be able to understand the force of a consti- tutional point, if you have sense enough to make it clear to them; and they will reach as logical a result in their verdict, and as certain a result, as twelve of the most talented constitutional lawyers, as a matter of fact. Now, take it on any other question. All you have to do is to give the ordinary man the information necessary upon which to reach conclusions, and he will reach just ones. There is not so much difference in men's capacity to reason as there is in the horizon of their knowledge. Mr. Weeks. Mr. Burgess, you referred to Mr. Gillespie, for in- stance, as representing a Texas district. Mr. Burgess. Yes. Mr. Weeks. I would like to ask you if, in your judgment, that district of the city of Fort Worth could send a man on this commis- sion which you suggest, or any other commission, which could better represent it than Mr. Gillespie? He is sent here for that purpose. This is a representative Government; and he is studying this ques- tion and has been. Where is the man in Fort Worth that is going to represent them on the currency question any better than Mr. Gillespie ? 14 CUREENCY LEGISLATION. Mr. Burgess. I will give you the complete answer to that, Avithout any reflection on Mr. Gillespie or any other member of the committee. If you will take this very committee and provide for full, public hear- ings all over the country, so that time may be given for the public mind to act, and so that this information may be brought out in the daily papers of New York and Chicago and St. Louis and Denver and Fort Worth and New Orleans and Atlanta, and representative citizens in all these great sections can appear before this committee and have three or four days' hearings, and all of that knowledge be disseminated and the people interested, I would just as soon trust the recommendation of this committee as perhaps any like number of men that might be appointed by the President. The personnel is not so important in the matter, except that of course they ought to be men representative of those localities. Mr. Waldo. Mr. Burgess, you have evidently thought about this question a good deal. There are evidently but two plans now under consideration, or that have been suggested by anybody, that are really best. One of them is the bill that is now really under consideration, the Fowler bill, providing for credit currency; the other is the Aldrich bill, which merely provides for an emergency currency to be used in case of panic, being practically the same that we have now, except that it is more highly taxed, and is to be secured by other kinds of bonds. Have you at present any idea which you would care to express with regard to the advisability of either one of those plans? Mr. Burgess. Yes, sir. I have, rather by a process of exclusion, reached a conclusion as to how I should vote on any of these matters if they came up. Mr. Waldo. I should like to hear that. Mr. Prince. Before that, I would like to ask one question along the lines of Mr. Burgess's remarks. You and I have been here for some number of years in Congress; have we not. Mr. Burgess? Mr. Burgess. Yes, sir. Mr. Prince. Do you know of any commission appointed by Con- gress whose findings ever received any attention after the commission reported to the House ? Mr. Burgess. Oh, I think so. Mr. Prince. "V\Tiat one? Mr. Burgess. I think the Industrial Commission has had a marked effect on legislation. I think its work appealed to the whole country. I think the report of the Waterways Commission will have a tre- mendous influence. Mr. Prince. I have no doubt about that; but that commission has not reported. Mr. Burgess. I think the report of the Monterey Commission had a tremendous effect on the intelligent thought of the countrj^; and if the subject could have been kept out of politics, I think it would likely have led to a practical settlement of the question long before it did. I believe that we have never had a commission of any re- spectability at all that has not been valuable. It may not have re- sulted in direct legislation in accord with its recommendations, and this may not. I do not say that it will. But I say that it is the best way in which you will be able to reach all sections and all sorts and conditions of men, and bring about a general approbation of any definite banking and currency scheme. CURRENCY LEGISLATION. 15 If you pass the Aldrich bill, do you know what will happen politi- cally ? The people of every section outside of the East, Republicans or Democrats, will jump on it as a Wall street scheme; because I find, in traveling out in the Middle West and the Northwest, that the Re- publican out in that section has precisely the same idea of the eastern Republican that the southern Democrat has of the eastern Democrat. He looks on him with suspicion from the start. Mr. Pujo. We are not all that way, Mr. Burgess. Mr. Burgess. Perhaps not ; but they are nearly all that way. That is my notion about it. I find, in making trips out in my part of the country, and coming in contact with citizens of representative thought and intelligence, that they are disposed to think the Republicans and Democrats very much alike, and that Wall street is in it for Wall street alone. I would not be surprised, myself, if there was a good deal of truth in that. That is rather natural. Not that I think that every man who has any property over there is corrupt and a scoun- drel. I think that is demagogy and ridiculous. That is my opinion about it. But that will follow. I think that the main trouble about doing the wise thing, to which I am very favorably inclined (because I infinitely prefer the Fowler bill, in a general way, to any such bond- asset currency scheme as the Aldrich bill), is that you will never get that bill through the House unless you conduct a great campaign of education among the people. Mr. Hayes. Let us begin it right here, Mr. Burgess. Mr. BuEGESS. Very well; I am lending all that there is in me to- ward it now. I am trying my best, and I will be glad to have your cooperation. But the people do not hear very much about what goes on in this committee room. Some of us would be very much more prominent at home if that which is done outside of the Congressional Record were as well known at home as that which is shown by the Congressional Record. Mr. Hayes. Very true. Mr. Burgess. And that is the trouble about committee hearings. If it comes to a vote, I will state in a general way what I think — and I will qualify that ; I will not agree to be bound in the future by any- thing I say along this line now. [Great laughter.] I am frank to say that I am uncertain ; I am feeling my own way ; and as I started to say a while ago, when I was interrupted by one of the gentlemen, so far as I have reached any conclusion it has been reached more by an exclusive process than it has been by any comprehensive, constructive study of systems as systems. For instance, I shall not vote for any guarantee-fund scheme. That is out of it with me. I think that would be a great mistake. Some great men and some wise men and some good men are for it. I have no controversy with them. The Chairman. You mean the guaranteeing of deposits? Mr. Burgess. Yes, sir; I think that would be a great business blunder. The Chairman. Why? Mr. Burgess. I can give two or three reasons; but I will give one that is all-sufficient with me, and I received it in a letter from an old friend of mine whom I regard as one of these plain, old farmers, but one who has a " blue bucketful " of sense about anything. I wrote and asked him what he thought about this thing, and in my judg- 16 CURRENCY LEGISLATION. ment he laid it out in a breath. He said: " George, the Book says that ' the fear of the Lord is the beginning of wisdom.' In my judg- ment the fear of the depositor is the beginning of wisdom in banking." [Laughter.] That is my view. The Chairman. Wait a minute, Mr. Burgess; let me ask you a question right there. Will you state how many, in your mind, out of the 5,000,000 depositors of the country (assuming that figure for this purpose) are intelligent depositors that know a bank statement when they see it; and if they do know a bank statement, how many know anything about the true inwardness of the bank? Mr. Burgess. I think there is a great deal in that, Mr. Chairman. The Chairman. Well, how many? Make a guess, in your judg- ment, as to how many out of the 5,000,000 depositors, in the first place, know what a bank statement is ; and how many of the 5,000,000 who have deposits in banks know anything about the bowels of the banks in which they are putting their deposits. Mr. Burgess. In a time of profound banking peace and universal confidence, when nobody is afraid, very few pay any attention to those things. But whenever the slightest cloud gathers on the hori- zon the knowledge of the depositors begins to increase very rapidly. The Chairman. Does that do the depositor any good ? Mr. Burgess. Yes. The Chairman. After the bank fails ? Mr. Burgess. No; not after it fails. The Chairman. Does it do him any good to go to the bank after its business is crippled ? Mr. Burgess. Yes ; it does the banker an immense amount of good. Looked at conversely, it may be true that not a depositor really knows about the condition of his bank; but the bank people do not know how much he knows. And when the directors and the presi- dent and the cashier get together to scheme about what they will do with their deposits, they are more influenced by the fear of the de- positor than they are by anything else on earth to manage their busi- ness conservatively. It operates as a tremendous check on them all the time; and this scheme would take all the check off. Then, in a period of inflation, God only knows what would happen to the country. The Chairman. Suppose we were a board of directors of a bank, and suppose we had bought our insurance for the bank ; do you mean to say that there is one man sitting at this table who would vote for an unsound loan or do a thing if he was insured that he would not have done before? Mr. Burgess. Yes, sir. The Chairman. In making lawful profits? Mr. Burgess. Yes, sir; emphatically. The Chairman. What? Mr. Burgess. I do mean to say that very thing. The Chairman, Hold on. Suppose we all owned the bank; sup- pose that every share of the stock of this bank was represented, and there was a million dollars of it, say, Mr, Burgess, Yes, The Chairman, Do you mean to say that there is one man sitting here that would vote to accept a note after the bank was insured CURRENCY LEGISLATION. 17 that he would not before, so as to cut clown his profits, so as to ruin his reputation, so as to destroy his standing? INIr. Burgess. No, no. Now. wait a minute. If you will pardon me, if we all believe that to make a loan would destroy our credit and break dow^n our business we would not make it, whether the deposits were guaranteed or not. The Chairman. All right. Mr. Burgess. Now, wait a minute. If the deposits were guaran- teed, and there was some question about the security, some question about whether the shares of stock that were invited to invest in a particular enterprise would earn a certain amount in dividends, the fear that the depositor might kick about the investment would make us scrutinize the investment much more closely. That is what I think about it. The Chairman. Do you think the thought of the depositor would have any effect at all on that as compared with the judgment of the men who were voting their own money ? In the last resort it is their capital and their funds, and thej^ would be voting them away with a double assessment on top of them. Do you think they would do that? Mr. Burgess. I do. Yes, sir ; I do. I do not think there is any doubt about it. Let me illustrate a case, without giving names. A little bank of which I knew, with $50,000 capital, had $340,000 deposits belonging to farmers. There was offered to it for discount some eastern paper, at 8 per cent, amounting to about $150,000. One of the depositors who had only $15,000 in the bank out of this three hundred and forty odd thousand happened to hear of it; and he re- marked to one of the directors : " If you loan those deposits on that eastern paper, suppose it should turn out that it could not be met, or got tied up in some way in the banks up in New York or Chicago, and these depositors should want their money, and I should want mine — then what are you going to do ? " And the old German presi- dent of the bank said, " Veil, ve vill not loan them dot money." [Laughter.] Now let me go along that line a little further. The Chairman. Just a moment. Do you know that when the deposits and the notes are guaranteed, the fund is not responsible for a cent until the entire stock of the bank is wiped out, and a double amount put in? Mr. Burgess. Oh, yes; I understand that. The Chairman. And the bank must absolutely fail and all the men be discredited? Mr. Burgess. Yes ; I understand that. The Chairman. And yet you say that the borrowers would sit down with the owners of the capital stock, and the banks would make a more unsound loan after they were insured than they would before, when it is their own money they put up to do it ? Mr. Burgess. Yes, sir. I will put it this way Mr. Powers. I would like to ask a question. Mr. Burgess, do I understand your position to be this: If the deposits were guaranteed, so that the bank did not fear a run upon it by the depositors, and so that the depositors would feel all right, is it your idea that some banks that are not managed conservatively — and there are some not managed conservatively — might underwrite stocks or make loans 3738]— 08 2* 18 CURRENCY LEGISLATION. where there was a prospect of large profits, believing that they could jDLiU through, which they would not underwrite and would not make if they had the fear of the depositors behind them? Is that your position ? Mr. Burgess. That is exactly my position. Mr. PoAVERS. I am very much of the same opinion, to be frank with you. And in addition to that, is it really just and fair to make banks that do a conservative banking business responsible for the doings of banks that do not do a conservative banking business ? Mr. Burgess. I think not. Mr. Powers. Hence I have not been able, myself — I agree with you — to see my way clear to favor the guaranteeing of deposits. Mr. Burgess. Before passing that — because I want to exclude some things and reach a conclusion and give the committee my opinion for whatever they think it is worth about the systems involved — I want to briefly state two other objections to the guarantee proposition. One is that it smacks of paternalism, not to say socialism, to " jack- pot," if you will permit the expression, the wise and the honest with the foolish and dishonest [laughter] , and tax all to protect the depos- itor against the action of the foolish or dishonest. The Chairman. It is just like life or fire insurance, is it not? Mr. Burgess. Yes, sir; but I am against the Government going into life or fire insurance. The Chairman. But you do not understand tha(^ the Government is going into this fund under my bill ? Mr. Burgess. I do, Mr. Chairman. The Chairman. Why, not at all, not for one cent. Mr. Burgess. Oh, I understand the Government does not pay — — The Chairman. Not one cent. Mr. Burgess. I understand that; but the Government forces the system, and is responsible for it if it enacts it into legislation. It is no use to say that the Government does not pay anything. It does not affect the principle a particle whether we make an appropriation to force a thing to be done or whether we do it with money legisla- tion. It is utterlj'^ immaterial; we commit ourselves to the govern- mental principle in either event The Chairman. I beg your pardon. Mr. Burgess (continuing). Of requiring the honest and the intelli- gent to pay proportionately to protect somebody against the acts of the dishonest and of the unintelligent. That is exactly what you are doing. The Chairman. Hold on. If that were compulsory, you are right; but if it is voluntary, then you are all wrong. Mr. Burgess. Oh, well, that is a distinction without a difference. If you enact that sort of a law, you will force them into it. There is no difference between coercion and war, legislatively. It is the same thing. I would just as soon make them do it as to make the condi- tions so that they would have to do it. There is no use in making a bulwark of that sort of a thing. We will have to be responsible for the establishment of the principle; and it is a dangerous one. Why not do this? Why not provide a tax to recoup a bank for its lost loans ? The Chairman. Ah, that is a very different thing. Mr. Burgess. "Why? CURRENCY LEGISLATION. 19 The Chairman. I will tell you why — because there intervenes be- tween every, loss the bank makes the double responsibility, all the stock, and the personal reputations of the men. Mr. Burgess. That is true; but they are both keyed upon the as- sumption that they will act equally honestly. The Chairman. They are just as difi'erent as day and night. Mr. Burgess. That is all right ; but they are both keyed upon the assumption that the banker will act equall}^ intelligently and hon- estly whether the funds are guaranteed or not. The Chairman. Oh, I beg your pardon ; I beg your pardon. Just see the difference: Sup^DOse we are a bank sitting here; suppose the law provided that if we made a loss the banks of the country could be assessed to make up that loss. In that event we w^ould take any kind of a chance, because our stock and our personality would not be responsible for it. But in the other case the bank is wiped out, our reputations are gone, and the institution is absolutely eliminated be- fore the fund is ever re'^ponsible for a loss. Mr. Burgess. Well, I think that is true. The Chairman. Is not that true ? Mr. Burgess. That is true, but Mr. Weeks. Mr. Chairman, I take it that we would like to get Mr. Burgess's idea on this question. The Chairman. Yes. Mr. Weeks. I would like to ask him one question in line with the question you asked him a little while ago about the 5,000,000 of de- positors. The inference I drew from that (|uestion was the depositors did not make any note of the character of the bank in which they placed their deposits; that they did not know bank statements, and that they did not know much about it. I would like to ask ]\Ir. Bur- gess if, in his opinion, where the depositor has a choice in banks, he does not believe that 4,909,000 of those 5,000,000 depositors do inquire about the bank, whether it is conservatively managed or not, and place their deposits where they believe they will be safely and wisely taken care of? Mr. Burgess. Oh, of course I do. If the gentleman will take my statement, put concretely, a little while ago, all of that is included in the idea that those depositors now act intelligently and honestly as against dishonesty and want of business wisdom. But the depositors then will be indifferent. That will put a premium on unbusinesslike methods, so to speak. Mr. Weeks. Absolutely. Mr. Burgess. And instead of putting the burden on the depositor, as it is now, just as it is on any other creditor, to determine whether it is wise to make a loan or not (which is the correct business prin- ciple, as I understand it), it will eliminate all of that, and it will be merely a question of business or favor as to where the fund is. Mr. Waldo. It would be a question of interest, would it not? In that case it would be a question of which bank would pay the most interest. Mr. Burgess. Either interest in money or interest in some other way. Mr. Waldo. Yes. 20 CURRENCY LEGISLATION. Mr. Burgess. "\Aliereas I think it is better to have the honesty and business methods of a bank investigated by the depositor. But there is another reason, which is a practical one ; it does not g(5 to the prin- ciple involved, but I think it is sufficient to prevent the passage of such a bill now, even if it is wise, and that is this : You gentlemen are perhaps as familiar as I wit*h the fact that the amount of bank capi- tal and the amount of deposits in banks other than national banks is about equal to that capital and those deposits in national banks. We have no power over all the banks that are not national banks by this legislation. If you should enact a guarantee law the effect Avould be to provoke a tremendous crisis among the depositors in banks other than national banks, which involve half the total capital and credit of the country. The Chairman. What do you mean by " crisis?" Mr, Burgess. I mean this: Unless you believe that the passage of this sort of a law would make the boys go down in their old socks and their safe-deposit boxes and bring out their money and redeposit it, there is not any use in it. And assuming that that is true, as I think it is in large measure The Chairman. It would stop hoarding, in other words ? Mr. Burgess. Yes; I think that in a large measure that is true: that would be the temporary effect. But if that is true, then it would be equally true that these depositors in all the rest of the banks of the country — State banks, savings banks, private banks, private in- stitutions — would at once hie away to get their deposits and put them where they could not lose unless they were bearing interest and secured by proper security. So that you would' precipitate another tremendous trouble in the countrv. The Chairman. Why? ]Mr. Burgess. The answer that may be made by the distinguished gentleman is that State banks and savings banks could follow suit. Yes: but what is going to happen while they are following suit ? The Chairman. Nothing. Mr. Bi^RGESS. I think there is something going to happen. The Chairman. Nothing at all. Mr. Burgess. Or else there is nothing in the matter. The Chairman. Nothing at all. This thing could all be done be- fore that ever became effective, and all the banks in the country could become unified; and then what Avould you have? You would know that every bank had the same amount of reserve, instead of having trust companies like the Knickerbocker in New York, with sixty millions of capital, paying 4 per cent on deposits, with no reserves (and what they did have bank notes), absolutely making a war on the national banks. The situation there was such that one man said, when the question was up, " Oh. let them go to hell;" and when the Trust Company of America appealed for help up there, in conference, the national-bank people said, "Let them go to hell; they have been warring on us for j^ears and taking our deposits away from us because they paid 3 or 4 or 5 per cent interest on deposits." And so you have this contest going on in this country from one end of it to the other, without knowing anything about the bowels of your banks. Then, instead of having a national bank on one corner and a savings bank downstairs or upstairs or around the corner transferring securities, you would know something about your banks. CURRENCY LEGISLATION. 21 Mr. BuKGKss. I believe the chairman will agree with me (because 1 know, from reading after him, that he has been a close student) that no other country's banking system has any such feature as this. The Chairman. Absolutely the same feature — psychologically the same feature. Mr. Burgess. " Psychologically " is a big w^ord. The Chairman. That is all there is to it. Mr. Burgess. Do you mean that the German system or the French system or the English system or the Canadian system has any guarantee of deposits? The Chair:\ian. It does not make any difference. You guarantee 5 per cent on your notes; and when you have the Bank of France, which will take any amount of bills and rediscount them, and the public mind at once upon the failure of a bank reverts to this great central bank, psychologically it has the effect of quieting these people. Mr. Burgess. You will pardon me, Mr. Chairman, if I buck on that '■ psj^chological " proposition. [Laughter.] The Chairman. That is all there is to it. There is where your confidence comes from. Mr. Burgess. Now, in a general way, I will state what my view is; and that leads me to the exclusion of some of these other matters. I shall not vote for the issue of any emergency currency based upon bonds of the States, of the counties, or of the municipalities. [Ap- plause.] I believe that will do infinite harm in the country. I be- lieve it will put just where it ought not to be power to control the contraction and inflation of the currency of the country. I believe it will be unpopular; and if I were mean enough to be willing to hurt my country to benefit my party, I would not Avant a better thing than to have the Republican party pass the Aldrich bill. We should have the next House and the next Presidency, if they should do it. I want a banking and currency system which will be controlled locallj^, by local demand, and will not be in the power of any man or set of men to control at their sweet will. Hence, in a general way, I would be in favor of a bill the details of which I have not thor- oughly settled in my own mind ; but I w^ould be in favor of the appli- cation of the principle of the German system to our present national banking system in a workable way. I believe that can be easily done. I believe that w^e could require a gold reserve; we could re- quire a limit to the issue of notes; we could adjust a rate of interest which would make it work automatically, just as it does in Germany; and I believe it would take but a few years of education and experi- ence along that line to give us the finest financial banking and cur- rency system that the world has ever seen, and I believe we are going to finally come to it. That is one of the purposes I have in trying to provoke a general and a wide discussion. People misun- derstand these things. You go down home and say : " I am for an asset currency." They will say: "Ah, j^ou are for rag money; you want to ' bust ' the country ; you want to issue money on anything and everything." Thej^ do not know what they are talking about. They do not know. And you are not going to get an adequate sys- tem, in my judgment, unless you get some universal intelligence behind Congress which controls its action in the last analysis; and you have too many men afraid to support it. 22 CURRENCY LEGIEILATION. Mr. McKiNNEY. Mr. Burgess, referring back to the main propo- sition in your bill for the appointment of a commission, that com- mission to report at the next session, do you not believe that that would bring about an almost indefinite delay in legislation along this line ? Mr. Burgess. No; I think not. I think we would get the right sort of legislation quicker in that way than we will get it in any other way. Mr. McKiNNEY. You would not hope, would you, for a unanimous report from that commission ? ■ Mr. Burgess. I am rather inclined to think so. There might be some differences of detail ; but I think perhaps they would be minor. I think the major points of the system would be the same. Mr. McKiNNEY. Would there not be a majority report and a minority report to be fought over ? Mr. Burgess. I do not think so. Mr. McKiNNEY. And another contention along that line. Mr. Burgess. I do not think so. Mr. McKinney. Would there not be divided opinion on the part of the commissioners from one section as against those from another ? Mr. Burgess. No; I do not think so. My experience is (and I think it is yours) that whenever you discuss questions separately and apart from partisan politics, and all of that, with men who really want to get at the truth, they nearly always finally agree. Take a number of lawyers who are on the same side of a case, and are dis- cussing all the complicated facts and theories about it; it almost in- variably follows that those intelligent men get together and agree about what is the best line of fight. It almost invariably follows. I think that this sort of a process will keep this question out of partisan politics. "Wliere men are responsible to their constituents for their action, of course differences will arise from their different feeling of environment, and their preconceived notions, and all that. But when they get to discussing it as business men, I think — now, this is only my opinion, but I think there can be but one result — that you will get a recommendation of some sort of a working system along the line that I hope to get and that I am in favor of. I do not be- lieve that you would get from such commission a bond — secured, emergency— currency recommendation. I do not think so. I do not think you would get a central bank proposition from that sort of a commission. But I think you would find that they would, from a study of it, from talking with all the people and studying the whole question, evolve such a system as all of us would be willing to support. The Chairman. You refer to the German bank; that is a central bank. Mr. Burgess. I understand it is ; and as the chairman will remem- ber, " the German system made workable and applied to our existing national and banking system," was the way I put it. I am not in favor of a central bank of issue. And yet I am frank to say that the only reason I do not favor it is for the same reason that I do not favor some other things — because I am not willing to trust a partisan political power with the control of the volume of the currency of the country. That is the only real reason. If it were not for our bi- partisan government, our intense political activity, I really believe that that would be the sensible thing. That would be the practical CURKENCY LEGISLATION. 23 solution. But it is impossible, under our partisan conditions, to do that. So the next best thing is to fix it so that that can not be done, directly or indirectly, and let the local situation control. That is my idea regarding it. I thank you very much, gentlemen, for your careful attention. Mr. McKiNNEY. I want to ask you one other question : You recog- nize the fact that there has been an almost universal demand on the part of the people for some legislation making the currency more elastic? Mr. Burgess. Yes, that is true^to have an elastic currency ; so far as there has been any general demand, that is it. Mr. McKiNNEY. Now then, outside of extraordinar}^ conditions, the shortage of money for the business of the country is usually found to exist during the crop-moving time. Mr. Burgess. Yes; that is true — the cotton and wheat season. Mr. McKiNNEY. We are confronted with .a national campaign, and it will be at its height during this crop-moving time next fall; and under your plan we would have to let that go on under the same old conditions, without trying to provide a remed}' to be brought into effect and use at that time. Mr. Burgess. That is true. Perhaps the fact that I live in the largest cotton State of the Union and one of the largest cotton dis- tricts, and still am willing to take that position, is pretty conclusive proof that, in my judgment, I think it is best, and that my people will stand for it. I do not believe we will get any emergency cur- rency or otherwise that will be worth anj^thing to us. If you give us a bond-secured currency we will never get any of it, because we do not carry State and county bonds doAvn with us. We can not afford to. The rate of interest is too high. They drift to Wall street ; and we will simply have to turn around and dig up some money when the crop-moving time comes. Mr. Weeks. And are you familiar with the method of issuing clear- ing-house certificates ? Mr. Burgess. I think fairly so. Mr. Weeks. Do you think that if the national banks of Texas had an organization making them a clearing-house district, and currency were issued based on the same general security, and by the same methods that are used in clearing-house certificates in time of panic, that would be a sane and sound method of issuing currency for tem- porary purposes? Mr. Burgess. I doubt that, and I will tell 3'ou Avhj^: If the interests involved in Texas were confined to as few and as intelligent men as the big interests in New York are, that plan would very likely work. But when you have to deal with an infinite number of men, traders and depositors and borrowers in small amounts scattered over a large area of territor}'^, if j^ou get the slightest scare with one of them the whole lot of them come down on you, and j^'ou break down. I thank you very much, Mr. Chairman. STATEMENT OF HON. E. L. FULTON, REPRESENTATIVE FROM OKLAHOMA. ]\Ir. FuLTox. Mr. Chairman, there are three bills which I intro- duced, and which have been referred to the committee, to which I 24 CUERENCY LEG]SLATION. desire to call joiw attention. But inasmuch as I wish to get over to the House I will not take up any time in going into a discussion of them. I will simply call them to your attention, and ask that you give the same consideration to them that you will give to the other bills before you. The Chaikman. Will you tell us the numbers of the bills ? Mr. Fulton. The first one is 12655. That is the first I want to speak about. That is a guarantee-deposit bill. The other numbers are 12656 and 14403. No. 12655 is a guarantee-deposit bill; and I think, although I have not read the Fowler bill — — - The Chairman. Just go on, if you are in a hurry, and tell us what you wish to say. Mr. Fulton. That is what I was going to say — that No. 12655, as I understand it, is very similar to the measure which is under con- sideration by this committee; and I hope very much that a bill of that kind will be recommended by this committee. But, in case it is not, I trust that this bill 12656 will be, or something substantially like it. This bill, 12656, provides in substance that when any State has passed a law levying a tax upon the State banks for the purpose of creating a fund for the depositors in the State banks, the national banks in that State may take advantage of that law under 'such rules and regu- lations as the Comptroller of the Currency may prescribe. I was led to introduce this bill more particularly because of the conditions which prevail in ni}^ own State. Oklahoma has been the first State to pass a guarantee-deposit bill. I have liad the matter up with the Department, and, of course, they have not given us any opinion yet; but I am convmced from what I have heard from them that the opinion when they do give it will be to the effect that with- out legislation the national banks can not take advantage of that law. So far as I have been able to obtain information, no serious defect or serious happening has occurred by reason of this law as affecting national banKs; but they are very fearful that it will. It therefore seemed to me that inasmuch as this guarantee-deposit prop- osition is new (although I firmly believe in it, and believe it is right), it is possible because of its newness that we may not be able to get it through Congress at this session; and that for that reason it might be advisable to pass such a measure as this, so as to give the national banks protection during the interim. Mr. Gillespie. When does your Oklahoma law go into effect, Mr. Fulton? Some time in February? Mr. Fulton. Some time in February, I think. Mr. Gillespie. Of this year? Mr. Fulton. Of this year ; yes, sir. That is my recommendation ; and I have had a great number of letters from the national banks in my district in regard to this matter. T'hey are very serious in regard to it, and very fearful that it may result in some harm. The Chairman. Have you heard anything about the session that is now progressing in Kansas? Mr. Fulton. Yes; I have been informed that they have called a special session of the legislature for the purpose of passing something of this kind; but what has taken place there I know nothing of except what I have seen in the paper. The Chairman. I simply wondered whether you had heard of it. Mr. Fulton. No; I have not. CUREENCY LEGISLATION. 25 Mr. Gillespie. Is the legislature now in session in Kansas? Mr. Fulton. Yes, sir; it is in session at this time; and Governor Haskell, of our State, addressed the legislature, I understand, upon this guarantee-deposit bill, just a few days ago. The other bill. No. 14403, I will not take time to discusss. I would like to have done so; but of course, I realize that this committee is undoubtedly flooded with currency propositions. I do not get a mail in which some propositions are not sent to me. I know the same is true of the members of this committee, and for that reason I am afraid that possibly they may not consider all of them. In fact, you can not consider all of them ; and that is the reason why I wanted to call your attention to this bill. I do not claim that it is a panacea for all evils. I do not claim to know all about the money question. I simply have my views, and I have had these same views for some time. This bill, in substance, provides that all" paper money that is now issued by the Government, including national-bank notes, shall be canceled and retired, and that all paper money shall be issued by the Government. Under the provisions of this bill that can be done •with- out in any way affecting trade conditions. It also provides that this money, wdiich I have named '' national-bond notes '" — although it could be named anything, as far as that is concerned — shall be legal tender for all debts, public and private ; and the credit of the United States is pledged to the payment of that money. It is also redeemable in gold at the option of the holder of it, excepting that there is a pro- vision that if at any time the Treasurer of the United States is con- vinced or has reason to believe that a raid is being made on the Treas- ury he may redeem it in silver, and there is provision for a reserve fund of a certain sum. I shall be pleased to have the committee give the bill consideration, as I have sufficient confidence in m}' own views (more than I have in my ability) to believe that if I could take the time to present it I could show at least some meritorious features in it. Mr. Burton. How much gold reserve do you provide ? Mr. Fulton. The total reserve is to be not less than eight hundred millions, 60 per cent of it in gold coin or bullion and 40 per cent in silver ; and it is to be not less than 25 per cent of the total amount of these outstanding notes. We have in this country at this time, my recollection is, over $2,000,000,000 in paper money and currency. Mr. Burton. ^\niat is the limit on the amount of paper ciu"rency to be issued by the Government under your bill ? Mr. Fulton. There is no limit. Mr. Burton. And the gold reserve is to be the same, whatever the amount of the paper currency? There is no proportion between the paper currency and the metallic reserve? Sir. Fulton. No; I did not fix that, excepting that it shall not be less than 25 per cent. I w^ent on the theory that if you have a cur- rency that is exactly as good as gold, nobody will want gold ; that it might as well be tied up in the Treasure, for all the good it is doing; and we have in the Treasurj" to-day something like eight hundred millions in gold that is back of these gold certificates. There is not one person in a thousand that will go and present a gold certificate there to get gold. He does not want it. The only use they would have for gold would simply be as a protection, as a matter of insur- ance. But, as I state, my ideas are simply incorporated in this bill. I 26 CURRENCY LEGISLATION. do not claim that it is absolutely perfect, and I do not claim that it states exacth^ what I would like to have ; and that is the reason why I will not further take up the time of the committee in discussing it. I should like to have explained it further, but I find I will have to go; and I thank the committee very much for their courtesy. Mr. Powers : This is the old greenback theory, with a gold reserve of at least 25 per cent behind it, is it not? Mr. Fulton : Oh, no. Mr. Powers. That is the way I read section 5. Mr. Fulton. You did not read all of it, then. If it does state that, it does not state what I intended to state. Mr. Powers. There is no limit on the issue, and it is issued by the Government. Mr. Fulton. Yes, sir. Mr. Powers. And 3^ou would have a 25 per cent gold reserve. "Why, is not that the old greenback theory — that it would be issued by the Government and the Government's credit would be back of it? Mr. Fulton. The old greenback theory, if I understand it at all, was based on the idea of fiat money absolutely. Mr. Powers. "Wliile this has a 25 per cent reserve ? Mr. Fulton. And it is absolutely redeemable in gold. Mr. PoAVERS. Yes; but you have only 25 per cent reserve to re- deem it? Mr. Fulton. Yes, sir. Mr. Powers. And j^ou make it a legal tender for all debts, public and private? Mr. Fulton. Yes, sir. Mr. Powers. Just as the greenback was to be ? Mr. Fulton. Yes, sir. Mr. Powers. And there is no limit to the issue, as in the case of the greenback? ]Mr. Fulton. No, sir. Mr. Powers. I can see no particular distinction between that and the old greenback theory, except that 25 per cent reserve. Mr. Fulton. The distinction is all the difference in the world — that the greenbacks were absolutely pure fiat money, were not based on anything, and had no reserve. Mr. Powers. I know; I grant you your 25 per cent gold reserve. Mr. Fulton. And the gold reserve is just exactly on the same theory as the gold certificates. In other words, instead of keeping a twenty-dollar gold piece there for ever}^ twenty-dollar bill that is out, redeemable in gold, there is no more necessity for our keeping it than requiring a bank to keep it. The Chairman. How would you put that money out of the Treas- ury of the United States in trade ? Mr. Fulton. By loaning it, the bill provides. The Chairman. Loaning it? How can the Government loan its money ? Mr. Fulton. It has done it. The Chairman. I know, in times of peace; but how would you have loaned $500,000,000 this last fall? The Government has no relation to the business of the country. Mr. Fulton. Well, it does do it ; and whether that is a good excuse or not, I do not see why it can not do it. CUBRENCY LEGISLATION. 27 The Chairman. Who does it ? Mr. Fulton. To be sure, they do not literally loan it, but they deposit it around. The Chairman. That simply comes in as a matter of collection; but you propose to have the United States Treasury, controlled by such men as we have to-day at the head of it, tell the people in Washington and the people down in Texas how much money they shall have. Mr. Fulton. No. The Chairman. Who is going to tell them ? Mr. Fulton. For this reason — if I am in the banking business, I am going to tell them. If I want to borrow $50,000, I go up to the Treasury of the United States, and I bring security as provided for in this bill, and I borrow $50,000. The Chairman. Wliat kind of security ? Mr. Fulton. The security provided for is Government bonds. It is provided that the securities shall consist of United States bonds, the bonds of any State, county, city, or municipality of the United States, or the bonds of the insular possessions of the United States, provided that no bonds of any municipality shall be accepted when the amount thereof is less than 40 per cent of the assessed valuation. The Chairman. Then of course the bank will have to take its cap- ital and buy these bonds ? Mr, Fulton. Yes, sir. The Chairman. What margin do you give on the bonds ? Suppose the bonds are all right ; how much margin do you give ? Mr. Fulton. Sixty or 75 per cent ; I have forgotten what it is. The Chairman. Then you think, do you, that under your bill a bank would take a hundred thousand dollars and go down to Wash- ington and get seventy-five instead of getting back a hundred? Mr. Fulton. Well, I do not know about that proposition — whether it would or not. Mr. Gillespie. Do you limit your loans to banks, Mr. Fulton ? Mr. Fulton. Yes, sir; I limit them to banks. I am of the opinion, however, that strictly speaking there is no reason why it should be done. Strictly speaking, I believe the loans should not be limited to banks. I believe that any person who had the right kind of security should be permitted to go down and borrow this money when he wants it. The Chairman. Who is going to pass on it ? Mr. Fulton. The Treasurer. The Chair:man. Let us take the New York City 3^ per cent bonds. A few months ago the}^ sold for 110 ; now you can buy them for 65. Mr. Fulton. Yes. The Chairman. We have now 16,000 State banks, trust companies, and national banks ; and you are going to have one man here pass on those loans? Mr. Fulton. Oh, not necessarily one man. He can employ men to work for him. (After an informal discussion :) Mr. Hayes. Your idea, then, is that you would make of the United States Treasury a vast central bank? Mr. Fulton. It would have the appearance of a bank ; yes, sir. Mr. Hayes. Would it not have the functions of a bank? 28 CUERENCY LEGISLATION. Mr. Fulton. It would have the functions of a bank, save that it would not be a bank of deposit excepting of the Government funds. I am rather inclined to think, from the study I have given to the question, that we are never going to have the proper kind of a currency system here except through a Government bank. But I realize that it would be simply impossible to get such a bill as that through — just as impossible as it would be to get the Aldrich bill through. The Chairman. Wliy, you have got it right in that bill, have you not? Mr. Fulton. The Aldrich bill? The Chairman. Yes ; that is the Aldrich bill exactly, or something very near it. Mr. Fulton. No ; it is not the Aldrich bill ; not on your life. The Chairman. You are simply getting the Government to issue its notes on the bonds at the rate of 75 per cent of their market value. Mr. Fulton. The Government issues all of the money instead of the banks issuing it. The Chairman. That is what the Aldrich bill does, is it not ? Mr. Fulton. No; as I read it, the banks issue the money. That is, the Government issues it the same as it does now, but the banks take it, and then they issue it. The Chairman. They do not issue it; the Government issues it, and they distribute it. Mr. Fulton. They issue it the same as they issue it now. The Chairman. Oh, no. Mr. Fulton, That is the way I have read the bill. Mr. Craavford. The notes are signed by the treasurer and the cashier of the bank. ]Mr. Fulton. It is just exactly the same as it is now ; you can say that the Government issues it, but it is not issued, strictly speaking, until the bank officers sign it. That is what issues it. The Govern- ment does not issue it. I am very sorry that my time is so short. If I had the time, I could make my bill understood, at least in the way that I understand it ; but I simply have to go back to the House. Mr. Gillespie. Did you see the bill introduced in the Senate by Senator Knox ? Mr. Fulton. No; I have not. Mr. Gillespie. It is along the same lines with yours. Mr. Graham introduced it in the House, and Mr. Garland. According to my understanding, it is generally like yours. Mr. Fulton. If the opinion of the committee should be, after thinking of this matter, that there is any merit at all in my bill, and they want to hear it discussed, I shall be more than pleased to discuss it when you can give me the time. It would take me at least half an hour to give my reasons for it. Mr. ]\IcMorran. ]\Ir. Fulton, referring to your bill. No. 12655, as to guaranteeing deposits, have you satisfied yourself as to why the Government should stop at guaranteeing national bank deposits? Mr. Fulton. Wh}^ should it stop? Mr. McMoRRAN. Yes; AVhy should they stop at guaranteeing national bank deposits? Why should they not guarantee the railroad bonds of the country ? CURRENCY LEGISLATION. 29 Mr. Fulton. There is all the difference in the world, in my opinion. I do not know that I can clearly state it; but a bank is a public in- stitution in one sense of the word. It is connected, to-day, with the issuing of our money. It is a part of our financial system; and under our present laws the prosperity of our country practically de- pends upon the stability and the confidence which the people have in the banks. The confidence which the people have in railroad bonds does not cut a great deal of ice out in my country. Mr. McMoRRAN. Does not the same principle apply to the railroad bonds of the countiy as to the deposits in national banks? Mr. Fulton. I can not see it that way, sir. Mr. McMoRRAN. Are not the railway bonds in very many instances held as investments by the widows and orphans of our country ? jNIr. Fulton. Oh, they buy all sorts of things; but that is no reason why the Government should go into it. If the Government were con- trolling the railroads as it controls the banks, that might be a propo- sition Avorthy of consideration ; but the Government has not anything at all to do with the railroads except in the way of regulating inter- state commerce. If there are any other questions, I will try to answer them. I do not want to force my views upon the committee at all. I feel that this committee is competent to pass upon the kind of measures it wants; and I am further aware that without doubt there is not a member of this committee who is not better posted on this question than I am. But at the same time, having these views, I am willing to give them if they are desired ; and I thank you for your attention. I hope you will not overlook that one matter in regard to guarantee- ing the deposits of national banks. The Chairman. Are there any further comments to be made by any gentlemen to-day ? If not, we will stand adjourned. (The committee thereupon adjourned until to-morrow, Thursdav, January 23, 1908, at 10.30 o'clock a. m.) Committee on Banking and Currency, House or Representati\'es, Washington, D. C, Monday, January 27, 1908. The committee met at 10.45 o'clock a, m. Present: Representatives McMorran (acting chairman), Waldo, Hayes, Weeks, McKinnej^, Lewis, Pujo, Gillespie, James, Crawford, and McHenry. (Representative Powers entered shortly after the be- ginning of the hearing and took the chair as acting chairman at the point indicated.) Present also, A. N. Jordan, esq., of New York. The committee thereupon resumed the consideration of the various measures before it dealing with financial matters. STATEMENT OF A. N. JORDAN, ESQ., OF NEW YORK. Mr. Jordan. Mr. Chairman and gentlemen, I am not personally interested in this question, as I am not connected with any bank, but I have come here in the interests of the public, as a student of the problem. My studies date from 1902, when I took up the subject at the request of Mr. Conrad N. Jordan, who was a banker, had been formerly Treasurer of the United States, and was interested in finance and currency. I am appearing here at the request of Mr. Williams, the minority leader. I have had some correspondence with him, and he thought it worth while to bring the facts I had to the at- tention of the committee. In the present discussion of asset currency some elements have been omitted, and I take the liberty of presenting a few facts and sugges- tions, in the belief that they may be of use to your committee in clearing up the matter. These facts are based on United States Gov- ernment reports, letters, and returns from foreign banks, and upon newspaper clippings. Bankers claim that our national bank notes do not contract or expand with the needs of business; that our currency is not elastic enough to meet the demands. The advocates of emergency currency claim that the business of the country is too elastic; that the cry for more currency is only heard when the country is overtrading and speculating excessive!}^ : and that promoters have undertaken more new enterprises than the efficiency or capacity of labor, material supplies, and capital warrant. That is, these promoters are trying to do more than it is possible to do within the given time. They have gone beyond reasonable enterprise. I believe that if the ability to issue cheap credit exists during such a period, it will be used. Therefore, more enterprises will be undertaken and thus more capital absorbed, when the de- 30 CURRENCY LEGISLATION. , 31 mands for it are already too great. This will be caused by the fact that credit, ability to borrow capital, can be obtained so cheaph^ Remedies have been suggested. The supporters of the asset cur- rency plan suggest that our national banks shall be allowed to issue notes secured by the general assets of the bank and thus be enabled to meet the demands of business. The emergency theory is that as the country is undertaking more business than it can possibly perform, indicated by high rates of in- terest, increasing output of new securities and high prices for mater- ials and scarcity of labor, we must stop expanding credit for new en- terprises. We should pay off some of our indebtedness. Therefore more credit should be supplied only under such rates of interest as will be unprofitable to use this increased credit except as a means of preventing forced, and consequently disastrous, liquidation. The country would then be able to slow down gradually. We have a notable modern example of a flexible currency. Tho Germans invented it. I might say, briefly, that the Bank of Ger- many is allowed to issue notes to the extent of three times the cash it has in its vaults. These notes are duty free up to a sum equal to the amount of cash plus a " contingent fund " of 472,829,000 marks. I use the term cash in the sense of coin and bullion. Beyond that limit they are allowed to issue notes subject to a payment of a 5 per cent tax. The bank has to keep a metallic reserve in gold, silver, and govei'nment notes of one-third against its own notes and other public liabilities, the reserve being required against the notes whether they are subject to a tax or not. Has this been a success? From the first flexible issue it has never come back. It has gone on increasing. The duty-free limit has been extended until it now amounts to 472,829,000 marks. To-day the Germans are demanding a further increase and are issuing notes in denominations below 100 marks. In their original system they were allowed to issue notes of 1,000, 500, and 100 marks, but they find that by issuing them in lower denominations, 50 and 20 marks, the notes will stay out longer in circulation. This system landed the German nation in the mire in 1901, and has drawn it back again to-day. Germany had a big industrial depression in 1901, and to-day she is entering upon another. I quote from the financial supplement of the New York Evening Post, Saturday, January 25, 1908 : In Germany, however, a setback in trade is uuniistakably under way, espe- cially in the iron and steel industry. Does anyone suppose that because a currency is issued only under a 5 per cent penalty, or less, that the man who thinks he is making 20 per cent (on paper) will be restrained by a trifling thing like that? In other words, if a bank has only to pay a penalty of a 5 per cent tax on its circulation, and if it is getting 5 per cent or more on the rest of its credit, it is not going to be restrained from issuing this new currency on account of the tax of 5 per cent. Bear in mind that every borrower from a bank is paying the rate the borrower from the 5 per cent fund pays, and that the increased rate becomes necessarily the universal rate, as the distinction as to who is the borrower of the specific fund becomes impossible. The returns of the bank will witness how often the note issue has fallen within the normal limit. This system has cost the German people millions of dollars and will continue to cost until it is done away 32 CUERENCY LEGISLATION. with. If the Germans had adopted the Engiish or French systems, and when excessive speculation and overtrading began had run up against a 12 per cent rate for money instead of issuing flexible cur- rency, they would have saved a great deal of money that has been lost in unsuccessful ventures undertaken during the periods of infla- tion. As proof of this I would like to read an extract from United States Government report as to the industrial depression which took place in Germany during 1900 and 1901. This is from the consulate-general at Berlin. Frank H.']Mason, and is dated October. 1901. volume 2. Commercial Relations of the United States, 1901. At page 251 it states: Altboiiiih the year 1000 will be remembered as the one during which Ger- many passed the culminating point of a period of phenomenal development, and entered upon a period of reaction and depression, the duration of which can not yet be foretold, no trace of decline was apparent in the foreign commerce of the year. And at page 259 of the same report : It is generally conceded that the climax, or high tide of German prosperity, was reached during the spring months of 1900. * * * The clouds, which had been gathering for several months, burst, and rapidly overspread the sky. During the summer business became more and more stagnant and depressed, and the autumn failed to bring any sign of revival. Capitalists became timid and apprehensive: factories and industrial establishments of most kinds began to discharge employees and to shorten the working hours of those who were I'etained; industrial stocks declined in value out of all proportion to the fall- ing off of business, and by the end of November Germany was facing an eco- nomic crisis the extent and duration of which could be but dimly perceived. By the middle of January fifteen branches of industry in Berlin, which employed in normal times 83,319 operatives, had discharged 22,629 men for want of work. Even the great steel works of Frederick Krupp, at Essen, turned adrift sevei'al thousand of their employees, and the Berlin Tageblatt estimated that one-fourth of all the working people of Germany were idle or insufficiently employed. Spring came, the war in China was over, but the hoped-for revival did not come. The depression continued until on the 25th of June last occurred the failure of the Leipziger Bank, one of the first and worst of a long series of fail- ures and suspensions of moneyed institutions which had been the mainstay and support of thousands of maniifacturing, mining, building, and inventive enter- prises that had helped to make the prosperity of Germany. * * * Trade, mining, and manufacture got into the hands of powerful syndicates, which were very effective so long as everything was prosperous and on the up-grade, but, as is now claimed, behaved badly by keeping up prices of coal, coke, and other staple necessities when the reaction had come and everyone needed cheap fuel and raw materials to enable them to weather the storm. jNIoreover, many of the selling syndicates maintaine;! their home prices unchanged, while pouring their suri)lus products into foreign markets at whatever prices they could get. As a result of all this, there is a general complaint that despite dull times, low wages, and gi'owing scarcity of employment, the cost of home-grown products and German-made goods has remained practically unchanged. This is from Dresden, quoting from the same volume, reported by the consul there : The anticipation of a continued era of pVosperity, as expressed in the last annual report of the Dresden Chamber of Commerce, has not been realized, and at present this portion of Saxony is suffering from depression and dull times in its connnercial and manufacturing interests. The earlier months of the pres- ent year seemed to justify optimistic predictions, but later an extremely strin- gent money market prevailed, followed by failures of manufacturing establish- ments and banks, from which it will take the Kingdom several years to recover. These conditions were brought about by overspeculation, resulting from five years of prosperity, and by the building of many new manufacturing plants CURRENCY LEGISLATION. ?3 and increasing the facilities of otlievs already in operation, wlii<-h caused a pro- duction greatly in excess of the demand. This is from Leipzig, in regard to the fnihire of tlie Leipziger Bank, of which I have spoken. The largest failure this year — in fact, one of the largest ever known — was that of the Leipziger Bank, an institution which was regarded by the general public as one of the best and safest of its kind in Germany. This bank closed its doors June 25, IDOl. The directors, the recipients of large salaries, were among the most prominent men in this section. Since the bank closed its doors two of the seven directors, the manager and his assistant, have been arrested and are now in jail, one is out on bail, one has committed suicide, and the other three are under police supervision pending the hearing of the case. Mr. Lewis. I would suggest that instead of reading so much his- tory that you just give us your views in as concentrated form as possible. Mr. Jordan. These are merel}^ extracts from the report of the United States consul at Berlin in regard to the depression that took place, and I desire to present them as showing the experiences of the German nation under flexible currency. Experience is the only true guide of a banker. The returns of the Bank of Germany at that time showed that from 1890 to 1900 its flexible currency issue was constantly expanding; and that, although it fluctuated from time to time, the 3'early average always showed a greater increase in per- centage in the notes than in the reserve held against the notes. For instance, in 1888, the metal held by the bank against notes amounted to 96 per cent of the notes and ■ Mr. Gillespie. That was in 1888 ? Mr. Jordan. Yes. In 1898 and 1899 that average dropped down to 72 per cent. That was at the time this period of overtrading and excessive speculation was taking place, and it had been brought about by this very increase in the expansion of the note issues of the bank. The German people had been led into it by being afforded cheap credits. Instead of running up against a high-money rate, they ran up against the issue of flexible currency, which led them into this ver}^ overtrading and speculation, because it produced fictitious ease. Mr. Waldo. Do I understand that you call it overissue and flexible currency where the people kept 96 per cent of gold against it ? Mr. Jordan. At the time the bank kept 96 per cent, in 1888; it was hardly a flexible issue. It did not begin to expand until after that. Then the reserve dropped down to 71 per cent. Mr. Waldo. Is it not the opinion of the authorities generally that 25 per cent of gold is ample for the redemption of all notes in any currency ? Mr. Jordan. It makes the currency safe as far as safety goes, pro- vided the other 75 per cent is issued against available resources. It has a bad economic effect on the country. It is unsound if it reduces the rate of interest during a period of speculative growth. Mr. Waldo. Do you imagine that it would make a great deal of difference whether you had 96 per cent of gold in circulation or whether 3'ou had 100 per cent in the Treasury ? Mr. Jordan. Yes, sir ; because in the one case you have got to have capital if you are issuing these notes against the gold. In the oth?r case it does not require any creation of capital at all. It is simply a credit note that is issued, and therefore you are allowing this note 37381—08 3* 34 CURRENCY LEGISLATION. to be ispued, which is a means of borrowing- capital. If you can issue the note under a low rate there is not much hindrance to bor- rowing capital. Mr. Waldo. Is it then your idea that the credits of this country, now amounting to about fifteen billions, ought not to be used, and that the only mone}' that ought to be used here is about seven hun- dred millions of gold ? Mr. Jordan. Xo, sir. My idea is that the credit of this country is furnished principally by bank-deposit credits. They are largelj'^ the exchange medium of the countr3^ Mr. Waldo. I do not mean as to the actual fact, but for safe financiering. Mr. Jordan. No. sir; not gold only, but there should be a limit to the amount of currenc}' issued other than against gold. Mr. Waldo. Is it your idea that no other currency ought to be in existence than that Avhich represents actual gold on deposit in banks or in the United States Treasury ? Mr. Jordan. To the extent that it would check speculation, yes. I believe that the only currency that should be issued should be against gold, or against United States Government bonds; that suffi- cient credit is obtained from deposits to carry on the business of the country, and that our circulation, which goes into the hands of the common people, ought to be secured absolutely ; that we are rich and strong enough to furnish a circulation which contains no element of insecurity. If the standard of value, gold, is increasing more rapidly than the demand for it in circulation, or as reserves of bank credits issued against value, the excess gold will seek a market and thus cause a depreciation in the purchasing power of gold, or what is commonly called a rise in prices. This rise in prices will stimulate speculation, or the holding of commodities and securities for a sale at advancing prices rather than a distribution of them to consumers or investors. The increase in prices will absorb more gold in circulation under a gold currenc}' and hence check the effect of the overproduction of gold. The inflation will then be held within bounds. A gold cur- rency system tends to keep speculation down and therefore to make the purchasing power of our gold dollar more stable. Mr. Gillespie. What was their reserve when the panic came in Germany ? ]\Ir. Jordan. When the panic came, their reserve had dropped to 72 per cent. Mr. Gillespie. Was that in 1901 ? Mr. Jordan. That was in 1900. The conditions causing the f)anic came about in 1900. The panic actually came in 1901, but the Ger- mans had been led into that panic by their flexible issue, because it produced a cheap money rate — a cheap credit rate. To-day the re- turns of the bank show that it had been constantly expanding for two or three years, and Germany is again in a period of depression. She has just entered it, being led into overspeculation by this very flexible currency system, because it has allowed low rates of interest. I con- tend that you can not check speculation except by high rates. Mr. Gillespie. You do not contend that the Germany currency system or financial system is not sound, do you? CURRENCY LEGISLATION. 35 Mr. Jordan. No, sir; not for a moment, if you mean in the sense of not being safe. Mr. Gillespie. None of their notes have ever gone to discount. Mr. Jordan. No, sir. Mr. Gillespie. But your contention is that under that system we can not prevent this tendency to overtrading, etc. Is that it ? Mr. Jordan. JNIy contention is that under this system you tend to bring about and prohjng these periods of overspeculation ; that it is not unsound currency, that the notes do not go to discount, but that you lead the country to overspecuhition. Mr. Weeks. Is it not true that Germany has been developing com- mercially more than any country in the world? Mr. Jordan. It is true that she has developed very rapidly since 1890, but that is the very thing that landed her in "the slough of despond " in 1901 and from which she has not been able to crawl out, nor will not until her currency system is done away with. The in- creasing output of gold did not commence until about 1892. Mr. Weeks. It is inevitable, is it not, when a country is developing, that it shall have periods of depression and recession ? Mr. Jordan. It is, if you allow it to go too fast. A distinction between the German flexible system and the English system is that in Egland w^hen you go too fast you run up against a high rate for money. If you run up against a low rate you w^ould merely con- tinue the speculation. Mr. Waldo. Do you know what the rate for money in Germany is to-day ? Mr. Jordan. I do not know it now, but the rate has been reduced since tlie 1st of January from T| per cent. Mr. Waldo. I mean at the time when you say the rate w^as too low. Mr. Jordan. The average rate for bills of exchange— well, the highest rate was only 5 per cent from 1888 down to even 1905, for which I have the data here. Mr. Pujo. Your contention is that it increases speculation by flexi- bility and elasticity of currency, resulting in inflation? Mr. Jordan. Yes. Mr. Pujo. Is it not a fact that the rate in France for the last forty years has been 4 per cent ? Mr. Jordan. I think so as regards the bank rate ; but as regards the market rate I do not think it is true. The rates fluctuate. I noticed it was 9 per cent at one time last fall. They do not have a flexible system, in my opinion. Mr. Pujo. But I am speaking of the rate of the Bank of France. Mr. Jordan. It varies from 3 per cent to 4 per cent. Mr. Pujo. Three per cent and a fraction. Mr. Jordan. The Bank of France does this: If it sees speculation breaking out, it will raise the discount rates and try to hold down that speculation. It will keep overspeculation in check, if possible. It keeps a reserve of probably 75 per cent to 85 per cent against its notes and other public liabilities. Mr. Pujo. What system do you consider the safe system, then? Mr, Jordan. I consider that our United States Government bond- secured currency as at present issued and currency issued against gold, dollar for dollar, is the safest and most economic svstem for us. 36 CURRENCY LEGISLATION. Mr. Pujo. At this time do you recall what the circulation is that is authorized in the United States? Mr. JoRDAX. An amount equal to the capital of our national banks, or about $900,000,000. Mr. Pujo. We could take out $900,000,000 of this circulation ? Mr. Jordan. Yes. Mr. Pujo. We have in circulation now $600,000,000 of national- bank currency ; $900,000,000 could be taken out. Senator Aldrich in- troduced a bill vi'aising the authorized issue $250,000,000 more. It is evident that one-third of the circulation authorized by law has not been taken out by national banks. It has been argued b}' some banks that the reason they will not take out the circulation is because they can not retire it when they have no need for it. If we would remove the limitation of $9,000,000 a month as regards retirement, would not that encourage the bank to take out $300,000,000, and would not that be the onl}^ legislation necessarv if the currency is safely secured by Government bonds? ]Mr. Jordan. I think the removal of the $9,000,000 retirement limit is very advisable, because the banks will not take out circulation when it is needed if they can not retire it when the demand for it is over. Mr. Pujo. I call your attention to the Bank of North America, which, I notice in the New York World of the 27th instant, has just gone into the hands of a receiver. Its capital is $2,000,000. Mr. Jordan. Yes. Mr. Pujo. Its circulation taken out is only $50,000. Does not that argue in support of the necessity of removing the limitation of $9,000,000? Mr. Jordan. I think it does to the extent that banks will not take out circulation if they can not retire it. Mr. Weeks. Is it not true that there has been practically a run on the National Bank of North America, of New York, for the last three months, and that they have been struggling to keep their heads above water, and that they have outstanding $4,000,000 of certificates? Mr. Jordan. I do not know the exact situation, but I understand that they have been under suspicion for some time and have been held over. Mr. Weeks. If you were a national-bank man, would you be will- ing to buy 2 per cent bonds at the rate of 107 or 109 to take out cir- culation against them, considering the profit that can be made on circulation at present? Mr. Jordan. That would depend on interest rates and to the ex- tent that it would furnish convenience to my depositors. Mr. Weeks. Yes ; but it might be a glut on your hands. Mr. Jordan. If there were no demand for notes it would not pay at 107 to 109. The very fact that you can issue currency and convert deposits into currency would bring you deposits as you serve the con- venience of your customers. Mr. Weeks. Suppose you bought bonds and paid 108 for them and .something happened, as it did last fall, and they dropped to 102 and you wanted to retire the currency? Do you think you are justified in risking that G per cent? Mr. Jordan. I think that is the risk of your business and you would be more than repaid by being of service to your depositors. CURRENCY LEGISLATION. 37 Mr. Weeks. If you were in a responsible position, you would hesi- tate about taking that risk. JNIr. Jordan. Banks speculate in bonds and the prices for bonds go up artificially ; but it seems to nie that it would be better for them to speculate in United States Government bonds and take that risk, rather than to take the risk of speculating in some other security. Mr. Weeks. I agree with you there. Mr. McHeisry. Suppose you have a bank with $500,000 capital. You can have $200,000 United States bonds, $200,000 for currency outstanding. Now, suppose you Avant to increase the ratio to $500,000. What are you going to buy those Government bonds with ? In what way does it give you more currency? Mr. Jordan. The only way is if you have credit power to purchase them with, you can extend your credit and purchase those bonds with it, or you may borrow them. You have that advantage. If you can not do so and have to pay out lawful money for them, you would lose. It is simply a question of wdiether you have sufficient credit to buy those bonds, or otherwise 3'ou would have to call loans. Mr. McHenry. That is the reason banks do not take out the money, simply because they have to put up good money to get this currency. Mr. Jordan. That would prevent inflation of the currency. There is another flexible currency system very much like Germany's, and I wish to mention that system. This is an extract from a short article which appeared in the Jouriml of Commerce and Commercial Bulle- tin Inst year: Berlin, July 21, 1907. A corrosi)oiideut of the Fraiikfurtor Zoituug, writing from Tokyo, gives details of tlie speculative establisliineiit of new iiulnstries since the close of the war with Russia. From July, 1905, to the end of 1003 there \Aere organ- ized 3,330 new companies, with an aggregate capital of $302,! '00,000, while 580 old companies added $123,000,000 to their capital. This niovonient went on with increased intensity for the first five months of this year, during which 1,1G0 new companies, having a total capital of $112,000,000, were registered, while 249 old companies absorbed $03,000,000 of new capital. This excessive activity in establishing new companies has been accompanied by a wave of enormous speculation, all classes of the peo);lo, even down to the poorest, have been engaged in buying stocks upon margii;. Instead of the hoped-for advance in prices, however, a sharp fall has latterly occurred, and a feeling of distrust among the people has become so marlvcd that various runs on banks have occurred. Some thirteen banks were forced to suspend paj^- ment, either temporarily or permanentl3^ That simply goes to show that under those systems Mr. Gillespie. What is that syslem ? Mr. Jordan. I refer to the »Tapanese system. The flexible cur- rency system there is modeled after that of Germany. After tlie Bank of Japan issues notes up to the limit of cash it is allowed to issue 120,000,000 yen, or about $50,000,000. and then is permitted to further issue under such tax as is placed by the minister of finance of Japan. The tax must be 5 per cent or morff. Under both sys- tems I have shown that these periods of overspeculation and exces- sive development of new enterprises have taken place. Mr. Waldo. Do you know what issue per capita was made at that time in Japan — at the time of greatest expansion ? Mr. Jordan. No, sir. The report of the bank does not show. I have written to Japan for further information, but have received no answer as yet. 38 CURRENCY LEGISLATION. ;Mr. Waldo. Do you know what the issue per capita Avas in Ger- many at the time you say this overspeculation came about? Mr. Jordan. Xo, sir. I do not Imow that, but I do not think that the per capita amount in circulation has as much to do with its use in business as its rapidity of circuLation. 'Mr. Gillespie. You have the outstanding note issue, have you not? Mr. Jordan. Yes, sir-; I have. Mr. Waldo. ^Yhsit is that? Mr. Jordan. The average outstanding note issue for the vear 1902 was 1.229.623.000. Mr. Gillespie. Marks ? Mr. Jordan. That was marks. The issues have never been as large as those of the 1st of January. 1908. I have a letter from the bank showing the issue to have been on the 1st of October, 1907, 1,617,034.000 marks. It shows a constant increase. There may be fluctuations from month to month, but during these periods of speculation this increase is going on. It is really a question of more all the time. Mr. Waldo. Is not that, perhaps, in ratio with the increase of wealth in that country? Mr. Jordan. If it were in ratio with the increase of real wealth there would not be any trouble from this overspeculation. I think it is more in ratio with the increase in speculation. Mr. Waldo. Have you any memorandum there as to what the actual increase of wealth was during that time? Mr. Jordan. Ko, sir ; I have not. I have simply a memorandum that the country is now in a period of depression, which indicates that its wealth could not have increased soundly. It was more an anticipa- tion of actual value. Mr. Weeks. Have you any information as to the relative volume of business in the last two years j^ou are referring to ? Mr. Jordan. Xo ; I have nothing in regard to that. It was very active, as indicated by imports and exports. I am able to show only the expansion of notes. Mr. Weeks. Do you imagine the currency output has increased any more rapidly than the volume of business has? iSIr. Jordan. It has not increased any more rapidly than business, but it lias increased more rapidly than the sound growth of the country, otherwise there would not have been this period of depres- sion. Mr. Waldo. What is your opinion as to the gradual recurrent periods of depression in all countries where there is great increase in manufactures and lousiness of various kinds, under any system of currency ? ^fr. Jordan. I believe that under certain conditions these things always arise, that » period of cheap money tends to increase business activity, and the increased business activity finally leads to over- speculation. ^Ir. Weeks, ^y\\\ not thi!t always be so without regard to the currency? Mr. Jordan. This will always take place after a speculative con- sumption of capital, but in some countries you would have it to a greater extent than in others, owing to the cu.rrency system. CURRENCY LEGISLATION. 39 Mr. Gillespie. Ts it not true tlint Japan fir^t started out when she inaugurated a banking- system with a system modeled on our present national banking system and afterwards changed to the Geraian system ? Mr. Jordan. She did. T understand that Congressman Fowler remarked that Japan had a bond-secured currency and that she abandoned it and took up the flexible currency system because the former had not worked Avell there. Under this ^'erv flexible currency system she experienced a panic, runs on banks, etc. ]\Ir. Hayes. How long ago was this panic that you s])eak of in Japan? Mr. Jordan. During the spring of 1007. Mr. Weeks. How many banks have they there ? Mr. Jordan. I can not tell you the number of banks there now. In the last information I got from Japan there is an outline of the banking system, but it does not show the number of banks. Mr. Pujo. Have j^ou studied the provisions of what is known as the Aldrich bill ? Mr. Jordan. Yes. Mr. Pujo. ^A^iat are j^our views on that measure? Mr. Jordan. I am very much opposed to it. Mr. Pujo. I mean as to the character of the currency and the issue under it. Mr. Jordan. Even as a believer in an emergency currency I am opposed to it, and my opposition is on account of allowing railroad bonds to be used as a basis of cii^culation. Mr. Pujo. Assuming that that is to be eliminated and that it will be confined to United States Government bonds solely, to protect the issue under it, what are your comments on it ? Mr. Jordan. I think it would be very good, except that I think that the currency could be rearranged so as to be more easily issued and that it should be prevented from being absorbed by speculation b}'^ increasing the tax to 1^ per cent per annum. Mr. Pujo. As to matters of detail, yes. It is onW deficient in your judgment as to matters of detail if the issue is protected by United States bonds ? Mr. Jordan. Yes. and a tax to prevent its absorption by specula- tion. Mr. Pujo. You would not include State or municipal bonds? Mr. Jordan. No, sir; because I think that would lead to dealings in order to retain political power. The objection there would be that an Administration could grant this privilege for the purpose of ob- taining political support. I think it is too dangerous. Mr. Weeks. In what respect Avould it be different from the present system if you limit the issue to United States bonds? jNIr. Jordan. It would not be at all different, but I Avould suggest that it be changed so as to make it more serviceable and prevent its use in speculating in bonds. Mr. AVeeks. It would be the same thing ? Mr. Jordan. As it stands, yes. Mr. McKinney. Whnt recommendation have you to make in con- nection with the present system? Mr. Jordan. A further extension of our United States bond- secured currency under such terms and conditions as will provide 40 CURRENCY LEGISLATION. an emergency circulation onh' and facilitate the issue of notes in small denominations. It is the best currency system ever used by this or an}- other country. If the people desire the cheapest and safest form of currency in daily use yet known to any commercial nation to be perpetuated for their benefit, they will refuse to allow the destruction of our present United States bond-secured national- bank notes. There is no reserve required against this currency. It has proven absolutely safe, and has secured the confidence of the public. Ever}" bit of capital given for the bonds was used. Mr. jMcKinney. We have that, have we not ? Mr. Jordan. We have. Mr, McKiNNEY. What I asked you is, what do you propose in addition to the system we have or in amendment of it ? Mr. Jordan. Due to the fault that we can not get small notes promptly when we want them under our present system, we should liaA^e an amendment so that a portion of our notes could be issued as one note, instead of being issued as 6,500 different notes, or, in case of the adoption of asset currency, even more. If such a provision existed, banks could perform all the banking functions of the year with the amount of notes now in existence, because a large amount of currency is hoarded in these small notes, owing to the fact banks can not get these small denominations when they want them. In order to supply the possible needs of their customers, banks hold more small notes than they need in anticipation of a demand that does not come. If the banks had an unlimited fund of small notes that they could tap at any moment, they would not hoard circulation as they now do. My proposition would be that State and national banks should both be allowed to obtain notes from a special fund of notes already prepared and distributed among the subtreasuries throughout the country. The banks would have to deposit gold coin of full value or United States bonds to the par of the notes obtained, and pay a charge of one-eighth of 1 per cent each time they took out these notes, which could only be issued and reissued during September, October, November, and December. The issue upon United States bonds should be limited to $100,- 000.000, and banks should pay a tax of 1^ per cent per annum upon the bo'nds while on deposit as security for these notes. The issue against gold should be unlimited, and the charge of one-eighth of 1 per cent would prevent undue use, also their compe- tition with our silver certificates. If the Comptroller of the Currency were permitted to have notes printed different in form from any now in use, they could easily be assorted and returned for redemption. I do not think their di:f- fei-ence in color and form would be a danger signal, as they would be in constant circulation as against gold. They would merely in- dicate the inability to obtain small denominations in our other forms of currency. The notes, l)eing ])]aced in the subtreasuries throughout the coun- ti-y. could be had instantly, and then banks Avould not have to wait foi'ty-five days to have their circulation printed, or about ninety days, regally, in ordei- to get a properly seasoned note. By allowing tlie issue of these notes against United States Gov- ernment l)onds under a tax of H per cent on the bonds you would CURRENCY LEGISLATION. 41 prevent banks using this privilege to speculate in the bonds and would reserve the notes for an emergency issue. It would not be used in ordinary times except against gold. Mr. AVeeks. Are you aware of the fact that in the city of Pitts- burg alone they issued $45,000,000 of clearing-house checks Mr. Jordan. I understand tlic}^ issued a very large amount. Mr. Weeks. To carry on their local business during the panic? Mr. Jordan. Yes; but under this S3'stem I do not think the panic w^ould have taken place. The very fact that the banks would have the right to obtain these notes and could obtain them instantly, rather than have to wait two or three months for them, would pre- vent a general panic. As reason for this conclusion I desire to quote from a letter dated December 16, 1907, received from the Bank of England : I may, liowever, point out that only on one occasion liave the bank actually issued notes against securities beyond the statutory limit. It is true that in each of the three years you mention (1S47, 1857, and 1SG6) the Government authorized them to make such issues, but only in 1857 was this permission used. I may add tliat on the first occasion of their receiving such authority the bank raised their rate of discount from G per cent to 8 per cent ; on the second occasion they allowed the rate to remain at 10 per cent, the point at which it already stood, and on the third they raised it from S per cent to 9 per cent. Mr. McKiNNEY. Did I understand you to say that you favored State banks i.ssuing circulating notes secured by United States bonds? Mr. Jordan. Yes. Commercial banks carrying the working bal- ances of the community are based on the same principles, whether or- ganized under State or national law. Both State and national banks have to face the same emergency. The circulation would be safe, as it would be fullv secured by gold or United States bonds, and be a first lien. Mr. Gillespie. You are talking about the $100,000,000 of currency now^ ? Mr. Jordan. Yes, sir; as regards the issue of notes against United States Government bonds. The limit would not apply to issues against gold. Mr. Gillespie. You are not speaking about the 1^ tax and the one- eighth charge as applied to the general issue of banks? Mr. Jordan. Xo, sir; not to the present national-bank notes, onl}' regarding the proposed emergency issue. Mr. Gillespie. The present system you would change in some w^ay. Mr. Jordan. Yes ; I would suggest an additional currenc}^ privilege for use in emergency only; that is, to assist liquidation only. It would be a supplementary currency. It does not change the security for our bank circulation except by adding gold. Mr. Waldo. How would it have aided us in this trouble when banks were entitled to take out between two and three hundred mil- lions of additional currency, which they did not do at the time and which thev have not done up to date, although thev have increased it slightly? ' Mr. Jordan. Our national banks increased their circulation about $100,000,000 in the past year. The proposed issue would have been immediately available and could have been instantly retired. The additional circulation against bonds, being taxed 1^ per cent, would 42 CURRENCY LEGISLATION. not have been issued mitil the emergency came, as it would be unprofit- able to issue except as a means of preventing forced liquidation. Mr. Waldo. All that would be necessary to do then, to-day, would be to remove the restriction on the retirement limit of currency, would it not? Mr. Jordan. No. It would still take too long to get your notes. They must be instantly available. Besides, the privilege would have been exhausted before the emergency came if it were not subject to a tax sufficient to render its issue unprofitable under ordinary rates. Mr. Waldo. In taking it out it requires too much time ; but you can retire it at any moment to-day up to nine millions a month, and if we remove the restriction on the retirement you can withdraw your whole currency to-morrow, if you want to. Mr. Jordan. That would depend. There would be no true retire- ment about it if the lawful money deposited in the Treasury by the banks in order to withdraw their circulation were to be redeposited by the Government in the banks. The deposit of lawful money does not withdraw the bank notes from circulation; it merely retires an equivalent amount of currency. Mr. Waldo. That would answer j^our objection on the one side. It would be merely a repeal of the law that limits the retirement of nine millions a month. Mr. Jordan. Not altogether. Mr. Waldo. Would not that reach it on the one side? Mr. Jordan. Yes, on the one side. Mr. Waldo. All that is necessary on the other side is to change the machinery of issue. Mr. Jordan. To change the machinery of i&sue Mr. Hayes. There could be a direction in the law to the Comp- troller of the Currency to have that currenc}^ ready. Mr. Jordan. How is the bank to know when it will need it? The proposed issue would be circulated as the note of one bank. Any bank. State or national, could instnntl}' obtain the notes. Again, its simplicity would aid in redemption. (At this point Mr. Powers took the chair as acting chairman.) The Acting Chairman. You mean to reduce it to a form of cur- rency ? Mr. Jordan. Yes, sir; it would be a supplementary currency issued as a universal note. The Acting Chairman. In addition to what we have now? Mr. Jordan. Exactly. The Acting Chairman. If you have to put up Ixuids to the full amount Mr. AVeeks. AVhere are you going to get the lawful reserve to buv it? Mr. Jordan. If you have not the bonds or sufficient credit power you could not take out the circulation. Lawful reserve money could only be obtained by the banks paying out this circulation and substituting it in the hands of the ])ublic for lawful money. As regards a redemption fund, it Avould take away no money for reserves, because the redemption fund may be counted in reserves. The Acting Chairman. Do 3'ou think thut would render the sys- tem elastic? CURKENCY LEGISLATION. 43 Mr. Jordan. I should say so, as it would provide against extremes of either need of or issue of currency. The Acting Chairman. What is to retire them? Mr. Jordan. The tax of 1| per cent per annum. The Acting Chairman. IIow would you relire them on account of the tax ? Mr. Jordan. The deposit of gold coin with the United States Government would retire an equivalent amount from circulation. The Acting Chairman, Let me ask you this : Do you believe that the tax, be it big or little, under the present laws would have a thing to do with retiring currency? Mr. Jordan. Yes, sir; because if it was The Acting Chairman. Then, you think differently from what the}'^ do at the Treasury Department. Mr. Jordan. I do; I think it is a withdrawal of an equivalent amount of money, and is therefore the same thing as retirement of the bank notes. If the tax were sufficiently large as to take away the profits, and so make its issue of use only in an emergency The Acting Chairman. Let us follow that a little further. I wnll suppose that a bank lias tjiken out $50,000 and wants to retire it. You would iDermit them to carry in lawful money and deposit it in the Treasury. That stops their interest, but the currency is still out circulating, just the same as if it w^ere not retired at all. Mr. Jordan. Pardon me. That particular currency is not retired, but the money deposited is retired, which is equivalent. The Acting Chairman. There is no law impending that you shall only pay it out as fast as you get the other currency in. jVIr. Jordan. There should be. The money that is put in the Treas- ury for such a purpose should be held there; otherwise you Avould destroy the intention of your act and aid in inflation. The Acting Chairman. You would have to have special legisla- tion for that. Mr. Jordan. Yes. As regards the proposed issue, if you offered a premium of one-eighth of 1 per cent for the notes they would be sent home to you, and you could take them to the Treasury and ex- change them for the gold in the special fund. They could not be re- issued except during the fall and winter months. The Acting Chair^ian. I do not understand that under the exist- ing methods and under existing laws that a tax would cause retire- ment, because the banks would get rid of the tax by depositing lawful money, and therefore the tax would not have anything to do with retiring the currency. Mr. Jordan. It would not necessarily, under the present law, be- cause, although an equivalent sum of money would be deposited with the (lovernment. this money might be paid out again and not held for the redemption of the notes. I think such an act on the part of the Government defeats the retirement provisions of our national- bank act. However, I am not proposing to issue this additional cur- rency under the same methods. The Acting CnAiRivrAN. Do you believe that bond-secured cur- rency can be made sufficiently elastic? Mr. Jordan. Our United States bond-secured currency is suffi- ciently elastic if you prevent its being used to speculate in bonds. 44 CURRENCY LEGISLATION. Under the j^roposed methods I tliink it would be sufficiently elastic for safety. If banks did not absorb their surplus credits in an effort to carry inflated securities, there would be plenty of elasticity in our medium of exchange. I think the proposed issue would reach the needs of the country without causing inflation. If it did not work, it would not cause a dangerous inflation, and it could be done away with. You can not furnish sufficient currency to meet all the demands of an elastic speculation. The Acting Chairman. Have you examined the Fowler bill? Mr. Jordan. I have. The Acting Chairman. What do you think of the principle upon which it is based as to the currency ; also as to guaranteeing deposits of all banks? Mr. Gillespie. Let us get his opinion on the subject of guarantee- ing dej)Osits. The Acting Chairman. What is your idea about guaranteeing deposits ? Mr. Jordan. I think the guaranteeing of deposits through the me- dium of a guaranty fund is unsound, as it will not only produce confidence, but overconfidence. The Acting Chairman. I guess you and I agree on that. Mr. Jordan. This overconfidence would lead to greater specula- tion, and consequently a greater panic. My objection to the bill is on account of its currency and guaranty of deposits provisions. Its provisions relating to trust and savings deposits are very good, and its restriction as to payment of interest on demand deposits is a long step in the right direction. I am opposed to the introduction of an asset or flexible currency' into our banking system, managed as it is, and our people being so speculative. I think that credit currency would, during a period of rising prices, be used to produce greater inflation under a system where bankers not only do not attempt to check speculation, but, on the contrary, often encourage it. The reserve system is very unsound, as it places our national bank notes on the same footing as regards reserves as our deposit credits. The failure of any large demand deposit institution in a central reserve city would tie up the circulating medium of the common people, and thus cause great loss to those least able to bear it. The majority of the holders of our bank notes do not keep accounts with banks or borrow money from them, and are therefore only receiving the indirect benefits from banking. The insurance of deposits by the National Government would throw the burden on the people. It would produce overconfidence. The guaranty would be taken advantage of by speculators, and in the end jDroduce panic, even undermining confidence in the National Government. Compulsory insurance would weaken our system, as banks with a carefully selected line of assets would not care to be taxed for tlic speculative excesses and bad judgment of tlieir neighbors. Good banks would drop out of the system. Speculators would come into it, and would depend upon the guarautee fund rather than upon the convertibility of assets to secure confidence. The assets of the banks CURRENCY LEGISLATION. 45 which should loan on liquid or operating capital Avould boconit speculative and stringent. Unless there is some method of interested representation and effi- cient negative control of the loans of the banks their deposits can not be safely insured. This insurance is not like life insurance. A man naturally protects his life. His policy does not promise to give him another. It is not like fire insurance. The character of a house is fixed and the policy of insurance contains a clause that makes the policy voidable on the part of the company if any alteration is made in the house which affects its character without the consent of the company. The assets of a commercial bank are constantly changing and are not fixed in character. The positions of borrower and lender are constantly changing among its customers and depositors. The insurance of deposits without effective control would produce unsound banking. A mortality table based on the present independent banking system with its bond-secured currency, which figures out an annual tax of one-eighth of 1 per cent would more than cover any loss, can not be applied to your new system, where you intend to alter it so radically. If that is all the loss we have had under our present system for the last forty years, and our country has grown as it has, I think it is a pretty good system to stick to. Mr. McKiNKEY. As regards the circulation under the Fowler bill, how do you stand on that ? Mr. Jordan. I do not believe a note holder and a depositor should be placed on a parit3\ .V note holder should have greater protection than a depositor, because the depositor selects his bank willinglj^ and knowingly, and he should take the risk and not share it with the note holder. There should be priority of right of security as regards the note holder. A deposit is not an involuntary act. If a depositor loses his bank book he does not lose his account. If a note holder loses the note, he can not recover. It is not fair to the common people Mr. Waldo. But suppose you make a note which is a lien on all the assets of the bank? Mr. Jordan. That removes my objection. Mr. Waldo. You are opposed, as I understand you, to any sys- tem of asset currency ? Mr. Jordan. As regards to being introduced into our system, most emphatically; but that does not mean that I do not think it a good idea when properly handled, as it is under the Canadian and Scotch systems. Those bankers do not permit their customers to speculate with credits of the banks. These systems, however, are practically monopolies. The 35 chartered banks of Canada have a pretty gen- eral understanding through the Canadian Bankers' Association. I have a very high admiration for the way they handled this recent crisis. But in order to make a success of their system of note issues in this country it would be necessary to bring over their branch bank- ing system, their assets, the experience of their people under it, their bankers to manage it, and their staff to carry it out. There are about II banks in Scotland, and it is very difficult to start a new one. The Acting Chairman. Let me ask you one question more. We have had our system a good many years — forty or fifty years — and no other nation in establishing a system has seen fit to follow it. 46 CUKRENCY LEGISLATION. Mr. JoRDAX. As far as that is concerned, the Japanese followed it and then abandoned it. The Acting Chairman. They followed it a veiy short time and threw it out. Mr. Jordan. On account of a rebellion, and also I believe they w^ere on a silver basis. It was an unfortunate decision, or rather unjusti- fied, in light of what happened last spring. I referred to that a short while ago. Mr. Hayes. I want to ask if it is not true that there is no other commercial nation in modern times that has had what we call a cur- rency or money panic? If there is one I never heard of it. Mr. Jordan. I think panics are produced by loss of confidence in the banks, as a rule, and a desire of people to convert their deposits into immediateh' available resources under any and all conditions — gold. Although the inability of a government that issues paper money to convert it readih^ into the standard of of value of that country, with which the paper is supposed to circulate at parity, has caused money panics. Mr. Hayes. No, not entirely. That might be debatable, but is there any other commercial nation that has had a currency panic in the last fifty years except the United States? Mr. Jordan. I do not think we have had one. Mr. Hayes. "Well, I have been through two myself, and I am under the strong impression that we have had. Mr. Jordan. I did not quite catch the question. I was referring to 1907. I do not think it w^as a currency panic. I think it w'as a de- positors' panic. Mr. Hayes. I could not get any money in 1894, even on United States bonds. I could not raise it on anything. Mr. Jordan. That was because of the belief we were going on a silver basis. Mr. Hayes. Is there any other country in the world that has had such a panic as that ? Mr. Jordan. Not that I recall at the moment." There was a panic in Chile last j^ear and their paper money depreciated. Mr. Waldo. I would like to ask one question that goes into the fundamentals of this thing. Is there aii}^ reason why the laws of this country should- compel bankers, or an^^one who desires to go into the banking business, to accept deposits and be prepared to pay out lawful money at any time, on demand ? In other words, let me put it in concrete form : With fifteen billions of credits due to de- positors in the banks, there is in actual existence to-day, if I remem- ber correctly, about three thousand millions of money of all kinds — less than one thousand millions in the banks; that there is a little less than one billion of all kinds of surrency to meet fifteen billions of credit; and under our present system the only thing they can be paid with, to act legally, is that one thousand millions. So the banks are put in a position Avhere, in case of a depositors' panic, as you call it, they are all at once insolvent because the}^ can not make payments. Mr. Jordan. It should be as regards commercial banks. If it were not, banking w'ould cease, as working balances would not be carried with banks unless depositors could convert their credits into the standard measure of value (gold) or money on a parit}^ therewith, CURRENCY LEGISLATION, 47 on demand. People would not deposit mone}'. You can not pay them off in times of distrust by changing the form of a credit to a circulating note. A banker banks on the fact that his depositors will not all want their credits converted into money at the same time. If they did, there could be no banking. In the panic of 1907 people were attempting an impossibility in trying to convert the credits of this countr}' into cash. The only recourse of the banks in affected centers was to suspend currency payments, as their loans could not be liquidated — just as in 185T. It was necessary for the mutual protection of all concerned. I do not think the small people were hoarding money as much as the larger ones. Asset bank notes would have been no relief during a panic caused by lack of confidence in banks. The public would have discrim- inated against them just as much as against deposit credits. We would have had a currency panic also, and the loss would have fallen on the poorer people. Those who remember the old currency, the profits of the men who handled it, and the daily occurring losses of the public, do not want to see its like again. Mr. Waldo. Is it not a fact that a large part of the circulation of the Bank of France is based on that very thing, and that there has never been any trouble ? Mr. Jordan. No, sir; because there is over 85 per cent in gold or silver, as a rule, held against its notes and deposits. Mr. Hayes. But that reserve is not against its own obligations only, but against those of all of the branch banks. It is a reserve for the whole nation? Mr. Jordan. Not exactly. The Bank of France is a branch bank- ing organization. The reserve is against all its notes and against all its deposits, whether of its head office or branches. It is not compelled to keep this reserve, but it is its custom. Mr. Hayes. A national reserve? Mr. Jordan. Its reserve is against its notes and public liabilities. It is the only bank that issues notes. Mr. Hayes. But not against its notes and its own deposits onh^ Mr. Jordan. Yes; though I believe it acts as a central bank, just as the Bank of England does, and discounts commercial paper due within three months upon indorsement of two other banks or bankers. Mr. Weeks. Now, to return to the Aldrich bill, you referred a little M'hile ago to the fact that issuing circulation against State or munici- pal bonds would give too much political power to the administration, I believe you said. Mr. Jordan. Yes, in the sense that it would give a privilege which could be offered by whatever party was in power. Mr. Weeks. In what way AvouJd that be accomplished? Mr. Jordan. In this way : The right of having the currency priv- ilege would aid in getting a better price. The understanding that the ))onds would be accepted as security for circulation would aid in marketing the bonds. The privilege would be of advantage to any State, county, or city. Mr. Weeks. Is there any objection to that ? 48 CURRENCY LEGISLATION. Mr. Jordan. It would permit a party to promise this privilege, or the extension of it, in return for support at election. Mr. Weeks. Granting what privilege ? Mr. Jordan. The acceptance of these bonds as a basis for security for national bank note circulation. Mr. Hayes. Do you think that in most times, if they had to pay 6 per cent interest on circulation, it would be a ver}^ great favor to them? Mr. Jordan. The net loss, about 2 per cent, resulting from the tax of one-half of 1 per cent a month after deducting the interest on the bonds, would be more than made up by profits from fluctuations of the stocks in which interested parties were dealing. Mr. Hayes. I agree with you. Mr. Gillespie. Your idea is that if New York saw an opportunity of having the privilege of making her bonds the basis of currency the citizens of New York, for this special advantage to them, ATOuld get behind the party there to its advantage ? Mr. Jordan. Yes, sir; or any other city, county, or State that de- sired to market bonds at a more advantageous figure. Mr. Gillespie. And if we should get on that system and there, should come up an}^ question of getting from under it, would not the citizens of New York make the claim that by virtue of the law you have boosted their markets, and that they have mone}^ invested and plead, just like the bondholders of the National Government, not to interfere with the market for the bonds? Mr. Jordan. That is a very good illustration.. It would certainly tie up the National Government with bond markets. There is no pro- vision in the Aldrich bill that w^ould protect the Government in case the bill failed to work as designed. I think there should be in every financial measure. Mr. Hayes, That I admit; but I do not see how the political power comes in, because the bonds of every State and every country and every municipality of a certain size are to be included in this basis for circulation. Mr. Jordan. I did not catch your question. Mr. Hayes. If it is the basis for circulation, I do not see where the political power would go with it. Mr. Jordan. Because, if political leaders wanted the support of any State or county they could promise to extend the privilege, say- ing: " Well, we Avill enable your city bonds to be used.'' The grade of the bonds accepted would gradually deteriorate. Mr. Weeks. Do you think that sort of nonsense is used in connec- tion with national currency? Do you think that any party of men in responsible positions w^ould use that sort of nonsense in connection with national currecy? Mr. Jordan. Yes. As regards deposits of funds in national banks, that has already been done. Mr. Weeks. What evidence have you that there is any political in- fluence whatever in connection with the policy of the Secretary of the Treasury in depositing funds in national banks? Mr. Jordan. In 1904 money was very cheap in New York and the country was in a period of depression. In fact, banks did not know what to do with the money. There was about ninety millions of money left b}^ the Government in banks throughout the country. CURRENCY LEGISLATION. 49 There was no need for that money. It was not demanded in busi- ness. Why was it left there? Was it for the purpose of starting an inflation to create an appearance of prosperity in order to obtain support in the Presidential election in the fall? That cheap money was at the basis of this present inflation. There is danger in it. That is what I say. Mr, Weeks. Have you any evidence that that was the reason it Avas left there ? Mr. Jordan. No; there is no evidence. It was done, and that is, to my mind, possibl}^ the cause of its being done. Mr. Weeks. Do you not think other reasons could be shown as well as that? Mr. Jordan. There might be. I would like to hear them. Mr. Hayes. Do you think that if there was a Democrat in the Presidential office, and there was a Democratic Administration, that the money would be scattered around just the same. Mr. Jordan. Certainly; it does not make any difference what the political principles of the Administration would be, the temptation would be there. Mr. Hayes. You do not have any idea that the money was left with the banks with a political understanding. Mr. Jordan. I think this: That it was not left there wdth a politi- cal understanding with the banks exactly, but that it was left with the idea that cheap money would cause a speculation in securities and create an appearance of prosperity just prior to a Presidential election, wdiich would tend to retain the Administration in power. Mr. Waldo. Do you think, for instance, that when this country gets back on a sound basis and the unsound speculation is squeezed out, and we start again to build up, that it will make the slightest difference in the starting of new schemes and the extension of busi- ness whether the currenc}^ is decreased $600,000,000 or whether it is increased $600,000,000? Mr. Jordan. It would make a verj^ great difference. If the cur- rency were decreased, it would draw money from the banks into cir- culation to replace that which was needed, causing a calling of loans and forcing liquidation. If the currency were increased beyond the needs of the country to exchange products or aid in production, it would produce an inflation. The excess would be used on account of low rates to carry commodities — that is, to store them rather than market them, with the object of selling them back on the wholesale market on a speculative rise. It would be used to carr^^ commodities or stocks for speculation rather than for retail distribution. If the excess issue w^ere great, it would cause cheap money and drive gold out of the country, possibly producing a panic. If we have the right to increase our currency, it will be exercised, for the very reason that if a speculator can obtain credit cheaply he will find means of using it. Mr. Waldo. Is not what is used in the country in business the fifteen billions of credit and not the three billions of currency? Mr. Jordan. Yes, sir; about 05 per cent of our wholesale business is conducted on credit and about 75 per cent of our retail. Mr. Waldo. Then the increase in currency would have little to do with the expansion of business, the starting of new manufactures, 37381—08 i* 50 CUREENCY LEGISLATION. the laying out and irrigation of new lands, the building of new rail- roads, etc., would it? Mr. Jordan. It would furnish more credit, and therefore aid, but if increased too rapidly, so as to produce great speculation, it would cause an overconsumption of circulating, or operating, capital into fixed investments, and thereby create a capital stringency. . The dan- ger would be the substitution of the currency in place of reserve money and the expansion of bank credits of four to one. Mr. Waldo. I fail to understand yet how the fact that there is six hundred millions or a thousand millions in currency has any effect in increasing the credits of this country. I do not see how it in- creases the credit of the country an^^ If it is based on Government bonds or securities, as it is to-day, or if it is based on deposits as pro- posed by' the asset currency scheme, that does not add anything, does it? It must be in the form of currency or in the form of credits on the books of the bank. Mr. Jordan. If you issue it as a note it would go into circulation in place of, say, gold, and the bank would obtain in exchange for it that gold, and thus be able to expand deposit credits further. Mr. Waldo. I know; but that note represents the assets of this country in some shape or other, does it not ? Mr. Jordan. If it is issued against value for the purpose of mar- keting products, it is sound. It may be loaned against the customer's credit, which may be mereh^ secured by a speculative value. It rep- resents an asset, but the asset may be fixed or circulating, a com- modity or an investment security. Mr. Waldo. If you hold that gold in the vault of the United States, or in the vault of a bank, and issue paper money against it you have not increased the credits of the country in any way, have you? Mr. Jordan. No;jrou have not. if you issue it dollar for dollar, as a direct representative — a gold certificate. Mr. Waldo. If, on the contrary, instead of issuing it against the gold you issue it against the deposits of the bank, joii have not in- creased the credit any, have you ? Mr. Jordan. In case you are paying off a depositor's draft in these notes, no ; but in case you are loaning them against the credit of your borrowers, you are increasing the liabilities of the bank. Mr. Waldo. If you issue them against the credit of the bank, then the credit on the bank book is gone the minute you do that, is it not ? Mr. Jordan. Yes; in case you are paying off a depositor, but in case you first place that amount to his credit on deposit and then transform it into notes, you are increasing. Mr. Waldo. I understand that. Mr. Gillespie. Mr. Waldo's idea is this, if I catch it: If the banks had a right to issue notes based upon their assets, that would not add to their deposit liabilit5\ but that the issue of these notes would bring down the deposit liability so that the aggregate of both under the new system would not be more than the deposit liability alone under the present system. Mr. Waldo. That is exactly what I mean. Mr. Jordan. If paid to a depositor in reducing his account, it would not be any addition. The note may be loaned out, however, and therefore the liability of the bank increased by the addition of CURREirCY LEGISLATION. 51 a new credit. The man to whom the note was paid by its original borrower would hold it. He would not deposit it promptly, like he would a check. These notes will be held out in circulation because they are mone}^, or a means of unconditional payment. A check is a means of conditional payment and will be promptly collected. Mr. Crawford. As to the political feature, I understand you to suggest that different parties might give assurances to States or municipalities that in the event of success at the polls the bonds of the State or municipality would be preferred to those of some other State or city. Mr. Jordan. No; not preferred, but that the privilege would be extended to their bonds. Mr. Crawford. That would mean to the exclusion of others? Mr. Jordan. No ; not necessarily to the exclusion of others ; but if they wanted to market their bonds they would like to get this right. Mr. Craavford. How would that be different from others that have the right? Mr. Jordan. It would not be any different, except that the market for the bonds would be wider if the citj had a better credit, and therefore the United States Government would be more secure. Mr. Crawford. In order that they might have the preference in this State that you refer to and have the preference over any other State or city, they would have to have their assurance from the suc- cessful party at the polls in order to meet vour objection, would they not? Mr. Jordan. They would have to be sure that the party was going to be elected. The}' would have to work for its election. I do not mean the bonds would be given preference. Mr. Crawford. That is to say, if one party would promise New York that in the event of success it would prefer their bonds to the bonds of Ohio Mr. Jordan. I would not say " prefer." I say " accept." Mr. Crawford. They could not all be used, because there would be a limitation to the amount of issue. Mr. Gillespie. If I understand Mr. Jordan's position, it, is this: Not that there would be any discrimination, but that all over the country there would spring up advocates of the theory of making a bond market for municipal bonds, and that would create a sort of political party. Mr. Crawford. Would not that necessarily follow ? Mr. Jordan. I say it would follow. Mr. Gillespie. That is his objection. Mr. Crawford. But that would not be by reason of anj^ sort of suggestion on the part of any party. Mr. Gillespie. He does not speak in any partisan sense, but of the situation all over the country. Now, I do not know whether you agree to this, but now. regardless of party, there is a strong political movement in this country for the continuance of the present bond- secured currency in order that the Government may float its securities at a low rate. Mr. Jordan. Yes. That is one trouble. Thej'' would want to be able to market their bonds, and would urge an increase of the privi- lege. The political support of these bond-market advocates would be sought by the party leaders. 62 CURRENCY LEGISLATION. Mr. Crawford. Suppose the registeir of bonds should withdraw the bonds as security for the notes, would the price of those bonds in the market fall? Mr. Jordan. Yes; if the privilege were withdrawn. Mr. Crawford. The market value would be less ? Mr. Jordan. Yes. Mr. Crawford. So that the fact that they are the basis of the cur- rency gives them a higher market value ? Mr. Jordan. It certainly does. Mr. Crawford. It was intended for that, was it not, primarily? Mr. Jordan. Not altogether. The idea originally, I think, was to interest the bankers in supporting the Union at the time of the origi- nal national-bank act. However, it furnishes the people with the cheapest and safest currency they can get. It only costs the people 1^ per cent per annum, $9,000,000, to keep that currency in circulation. It is worth it to the laborer, miner, and farmer, let alone to the vast business community. It was established, primarily, to replace the wildcat asset currency then in use by a safe currency. Mr. Crawford. Do you object to a bond-secured currency? Mr. Jordan. I object to any bond-secured currency except as against United States Government bonds. Mr. Crawford. Why so ? Mr. Jordan. Because I think it would become a question of politics, largely. The issue of United States bonds is under the control of the National Government, and its issue, except for the needs of the Government, would be severely criticised. Mr. Crawford. That is what I was trying to get at a moment ago, but r do not see any politics in it. Mr. Jordan. It does not necessarily start with it, but it will result, owing to the demand for the privilege in order to market the bonds. Mr. Waldo. If I understand you, when you say that politics will come in, what you mean is that whatever party might be in power, in order to keep itself in power, would urge the acceptance of munici- pal bonds from a given part of the country, and the issuance of more currency against it? Mr. Jordan. Yes; that party would inflate the currency in order to create a sort of boom. Mr. Waldo. To create a kind of sentiment in favor of the party which might be in power, whatever party it was? Mr. Jordan. That is my idea. It would make no difference what party it was. Mr. Craavford. Where the result of the election might hang upon so-called pivotal States, do you think the authorities here, the Secre- tary of the Treasury and the Comptroller of the Currency, who have the power under the Aldrich bill to determine what bonds shall be accepted, and when, and the value of them, might promise those par- ticular States an advantage? Mr. Jordan. I would not say that those officials would do it of their own initiative. Mr. Crawford. They have the power to determine it. Mr. Jordan. I rather think the party in power or their leaders would have that general understanding. Mr. Crawford. You think that those close States would have the preference in getting the currency issued, then? CURRENCY LKGI8LATI0N. 53 Mr. Jordan. Yes, sir. I think if there were any preference to be shown it would be toward the acceptance of bonds from those States that were close or favorable to the Administration. It is a well-known fact to persons who are posted in the manipu- lation of part}' leaders in several of our States, that as a matter of policy the State treasury maintains a large surplus against its debt on which it is paying interest, but which interest is offset hj putting the money out at interest among banks. The deposit of the money being under the manipulation of the party managers, this money was loaned to banks throughout the State with the understanding that the banks will be active and efficient in the management of politics in their locality, and that the application of the managers, their friends and adherents, for loans, would be favorably considered by these banks. Therefore a bill on the line of the Aldrich bill would tend to lead to dangerous inflation, producing an emergency rather than pre- venting one. It would be possible for party leaders and their friends who were interested in a security boom, or any other speculation, to have the city, county, or State in which their influence was predomi- nant, issue bonds and place same with friendly banks, leave the pro- ceeds on deposit, the banks obtaining currency against the bonds, and thus be able to carry the inflation higher. The net loss of 2 per cent on account of the tax would not hinder as the profits resulting from dealing in stocks would more than offset such loss. As the demand for the currency would be presented to the Secretary of the Treasury in the light of meeting the needs of business, it would hardly be difficult to obtain the necessary consent. Mr. Waldo. Are you connected with any financial institutions in New York? Mr. Jordan. Absolutely none. Mr. Waldo. * * * j-f ^^^Q^e is anything more that you think would be of use to us, I should like to have it. Mr. Jordan. I should like to say something about the bankers' bill, recommended by the American Bankers' Association at its last meet- ing in Chicago. I am opposed to this bill because I think it would cause a dan- gerous inflation. There is a provision for the daily redemption of notes in specie. I do not think, however, that it is practical to put their redemption system in operation. The difficulty of assorting and sending in for redemption the notes of over 6,500 national banks, a number of which would be largely increased in case banks were allowed to issue asset currency, would prevent their being sent in for redemption. The banks would sooner pay them out over the counter. This system works in Canada and Scotland, but there are only 35 banks which issue notes in the former country and 11 in the latter. They are branch banking systems, which are practically monopolies. The notes of national banks were redeemed under an almost similar system prior to the establishment of the bureau of redemption at Washington, June 20, 1874. The banks would not assort notes and send them to redemption agents. They paid them out over the counter. The sj^stem failed and the notes went to a discount. (The committee thereupon adjourned until Wednesday, January 29, at 10.30 o'clock a. m.) Committee on Banking and Currency, House of Representatives, Washington^ D. 6'., Wednesday^ January 29, 1908. The committee met at 11 o'clock a. m. Present: Representatives Fowler (chairman), Prince, Powers, McMorran, Weems, McCreary. Waldo, Haj-es, Weeks, Burton, Mc- Kinney, Diirey, Lewis, Pujo, Glass, Gillespie, James, Crawford and McHeniy, Present also. Franlv Miller, Esq., of San Francisco, Cal. ; T. C. Daniel, Esq., of Virginia; Samuel Gompers, Esq., and others. The committee thereupon resumed the consideration of the various measures before it dealing with financial matters. The Chairman. Is anybody here who desires to be heard this morn- ing? Are you gentlemen here to be heard or to hear? Mr. Frank Miller. We are anxious to hear from the officials of the Government first, if they are going to appear here. The Chairman. We have not heard from them as yet. STATEMENT OF FRANK MILLER, ESQ., OF SAN FRANCISCO, CAL. The Chairman. Please state your name. Mr. Miller. My name is Frank Miller. The Chairman. Are you a resident of Washington ? Mr. Miller. No, sir; I am living in California. Mr. Gillespie. You are from San Francisco? Mr. Miller. San Francisco, Cal. Mr. Chairman, and gentlemen, I have here a pamphlet, Mdiich I think probabl}^ you have already re- ceived. It is a pamphlet by Francois Meunier. I have read this pamphlet and simply want to indorse it. The substance of it is that Mr. Meunier evidently recommends the grouping of all banks in a certain section, without regard to whether they are State or national, into a corporation; that the corporation shall receive collateral from these different banks, and upon that collateral this syndicate, so to speak, shall receive from the Comptroller of the Currency notes not issued by the United States, but printed by the United States, and shall issue them. These notes, of course, are nonlegal tender. They shall not bear interest. They are to become due on a fixed date, and on that fixed date the money must be paid into the hands of the United States Government and shall remain there for the redemption of those notes after that date. The theory of the plan seems to be that an emergency currency has got to be very easily made and handled, and that the best way to terminate it is to make it payable at a definite date, after which the money shall remain in the United States Treasury for its redemption. That thereafter the notes will be equal to Bank of England notes. 54 CUEEENCY LEGISLATION. - 55 They will change from purely commercial notes into first-class repre- sentative paper. The Chairman. Does any gentleman of the committee desire to ask Mr. Miller any question? Mr. Hayes. I do not know whether Mr. Miller is prepared to be in- terrogated, but I would like to ask what is the object of making the notes payable at a certain date? I do not see any object in that. Mr. Miller. Of course I must express my own opinion, that the emergency currency is not to be as enduring as a rock. The ultimate credit is in it, and there is always an uncertainty in it until its pay- ment ; and, coming up against a definite date, it is either paid or dis- honored. Mr. Hayes. But what man is wise enough to prophesy when the necessity for that currency is going to come? Mr. Miller. These banks, I should think, would habitually issue these notes on three and six months' dates, and probably they would float at par at a three months' date. If the banks required a longer time they would have to issue them at six months or one year, and I think that pamphlet prescribes that the usury laws shall not apply. I have been in the banking business, and my theory is that the banker would stand almost any charge of discount in order to meet his depositors. Mr. Hayes. Why not let it be payable on demand, and let the necessity determine when it shall be paid ? Mr. Miller. Because when a banker is short of money he is not in need of demand notes. STATEMENT OF ME. T. C. DANIEL, OF VIRGINIA. The Chairman. Do you care to be heard, Mr. Daniel? Mr. Daniel. If there is no one else here I think I would like to contribute something. The Chairman. Where are you from, Mr. Daniel? Mr. Daniel, I am from Virginia. I will first state to the com- mittee that I am not interested The Chairman. You had a good bank at one time, before the war? Mr. Daniel. I have watched the currency question, or the money question, I would say, for twenty years with a good deal of interest ; and, after reading pretty much everything that everybody else has said on the subject, I felt it rather my duty to come here and make a few contributions to the educational fund myself. Before doing so, I will say that I traveled a good deal summer before last in England, Ireland, and Scotland. When I was in London I interviewed the Bank of England, and I also made investigations in France; and recently I have returned from a trip through Italy. Having had practical experience for many years in mercantile life in this country, I was investigating conditions there, to see, b}^ comparison, whether we could profitably imitate anything that they have in the way of a banking system. But since traveling around those countries I real- ize that the best civilization the world has ever known, and the best government the world has ever known, is right here in the United States. And the responsibility of the best civilization in the world rests upon the representatives of the people in the Congress of the United States. 56 - CURRENCY LEGISLATION. Now, when going through the Bank of England I presented a letter which I had from Secretary Hay, and the official of the bank was very polite. He took me through the bank, and when we got back into the reception room I asked him if he would allow me to put a few leading questions to him. He said he would, and I asked him if he could give me a statement of the Bank of England. '' We do not issue any statements."' " Does not the House of Parliament sometimes call on you for some statement as to the condition of the bank?" " No, sir; they do not call on us." " How do you regulate this whole business? Is it a close corporation? " " Well, the stock- holders get their dividends periodically, and that is all they have to do with it." " How is it that some of these revolutionists, so called, do not get up in the House of Commons and raise the devil to know something about what is going on down here ? That would be the condition in our country." *' Oh, most of them are very large borrowers from the bank, and we do not have any difficulty with them." [Laughter.] I tell 3^ou, with my experience and observation of twenty years, there is a whole volume in that, through the ramification of credit. Thousands and thousands of the best minds in this country are sub- servient. You can not find to-day five men out of a thousand who would come up here and express their disinterested opinion. Why? Because they are borrowers. Mr. Gillespie. Eight on that point, as to the Bank of England, Mr. Daniel, are they not required under the law to make a public statement every week or every two weeks in the London Gazette, giving the condition of the bank? Mr. Dakiel. Yes, they may be required by law, but the law is like a great many laws of our country — like the Sherman Act, which was on the statute book for fourteen years, and nobody took any notice of it. jSIr. Gillespie. But you can take the London Gazette and see a statement of the bank appearing there according to the law, anyhow. ^Vhether it is a correct statement or not of course I do not know. Mr. Daxiel. I say that you can not get a true statement from the Bank of England to-day as to its actual condition and who owns the assets. Mr. Powers. You certainly can get a statement. Mr. Dais'iel. You can get a kind of a statement, but so far as finding out who owns the assets of the bank is concerned Mr. Powers. It is distinctly a stock corporation. Mr. DA^IEL. Yes; as I say, it does not affect them so far as get- ting dividends is concerned, but they do not know the facts as to the true condition of the bank. Now, we come down to comparing this country with other countries of the world, and I can not see any reason why a country that has $117,000,000,000 of national wealth, and is creating about $3,400,- 000,000 of national wealth a year,' and which has $25,000,000,000 of internal commerce, should ever defer to any other country in regard to establishing a money system. What has impressed me in this whole question is this. The"^ Bankers' Association for several years has been meeting around the United States, and I suppose CUBBENCY LEGISLATION. 57 there is not a section of the world where men have not been trying to formulate something definite; but the great difficuhy seems to be that they do not locate on a firm foundation; they do not get correct premises, and consequently there is no logical conclusion reached. The money panic of 1907 has brought the issue at last squarely before the American people. It is no longer to be hidden in sophistry. The old catch phrases of fiat, ratio, parity, and bimetallism versus the gold standard, will no longer mystify the average intelligence of the American citizen. They are up against a currency famine in the most prosperous conditions the country has ever known. Giving additional privileges, in the shape of class legislation of the worst kind, to an obsolete national banking system, whose creation was only justified by the losses attendant upon a great civil war, will never be tolerated as being in the interest of the people. These banking corporations ever since they made large fortunes out of the war debt have been before Congress asking valuable con- cessions in order to perpetuate their existence. Unfortunately the United States Treasury Department has become a training school for presidents and vice-presidents of national banks ; and unless something is done to protect the people they will be so merged as to be practically in the same business. The maxim of the money lenders of the Old World will then be in operation : " Let us control the money of a country and we care not who makes its laws." This being the case, it is about time the American people who have created and own $117,304,211,917 of the wealth of this country should be heard. This question is of such vital importance to them that it throws into insignificance any legislation that simply deals with how the banks are to loan out $2,876,308,696 in the currency system. We find in the report of the Comptroller of the Currency at page 48 : Of the total stock of money in tbe country 11 per cent is held in the Ti'easnry as assets, 35.51 per cent is in reporting banks, and 53.49 per cent elsewhere, the per capita not in the Treasury or banks in 1907 being $19.36 or $1.03 less than in 1906. The Chairman. Will you repeat that last statement? Mr. Daniel. " The per capita not in the Treasury or banks in 1907 being $19.36 or $1.03 less than in 1906." The Chairman. Wliat do you mean by saying " in the banks? " Mr. Daniel. I mean in circulation. The rest is impounded in the reserves of the banks and in the Treasury Department. The Chairman. You do not mean by that the deposits? Mr. Daniel. Well, it is a very plain statement from the Comp- troller of the Currency. I do not want to alter his language. The Chairman. But I thought that as you used the expression you might define itl Mr. Daniel. I can define it from being perfectly familiar with it. That is the actual amount of money that is doing the work, or the money in circulation in the country. Mr. Crawford. You speak of the actual mone}', and not of the deposits ? Mr. Daniel. Yes. In other words, only $1,679,853,760 is in circulation and doing the work of monev. 58 CURREN-CY LEGISLATION. The question is now asked by over 86,000,000 people in this country, with no uncertain sound, How is the Congress of the United States, to whom we have delegated the authority, going to supply this need of a permanent addition of real money to our currency system? No other power has a right to obligate the people, no other power can issue a perfect mone,y unit, a legal-tender dollar, the ultimate of pay- ment. The money issued by the authority of Congress under the Constitution of the United States, exercising its sovereign power, derived from the 86,666,000 people of this country, is not only redeem- able in everything owned by them, but a legal tender for all debts, public and private, estimated at many billions. It is only necessary to realize the above facts to see how essentially the people are interested in the money question. It directly and individually affects ever}' citizen, from the lowest to the highest, every dollar representing the plighted faith of the poorest and the richest, one to accept it for his property and debts due him, the other for his daily toil. This being the case, and the inventory of the national wealth of the people of the United States being taken, I ask if any country or people can issue as good a dollar or money unit, with as much back of it, as the Congress of the United States can, having full power under the Constitution to obligate the entire national wealth of $117,304,211,917 for its redemption, as well as the life work and services of the population of 86,666,000, the most robust, enterprising, and productive people known to civilization, their homes and prop- erty being in a countrj^ described by Gladstone " as having the natural base of the greatest continuing empire the world has ever known," and producing everything necessary to the human family. Now. I have a summary here of the gold coin and bullion imported and exported in the years ended June 30, 1900 to 1906. Oold coin and huUion imported and exported years ended June 30, 1900 to 1906. 1900. 1901. 1902. 1903. 1904. 1905. 1906. Imported Exported $44,573,184 48,266,759 $66,051,187 53,185,177 $52,021,254 48,568,950 $44,982,027 47,090,595 $99,955,368 81,459,986 $53,648,961 92,594,024 $96,221,730 38,5^,591 Gold production. United States, for years as follows : 1004 $S0, 464, 700 3905 88, 180, 700 1906 94, 373, 800 1900 $79, 171, 000 1901 78, 666, 600 1902 80, 000, 000 1903 •— _ 73, 591, 700 This table will show that gold, so far as international exchange or trade is concerned, takes care of itself, as the difference between imports and exports is only $47,694,629 covering- a period of seven years, and the United States produced during this time $574,448,500, or annually $82,064,071. On page 3, Statistical Record, Department of Commerce and Labor, under the head of " Money in circulation " — I call special attention to it — is the following: " 1897. Gold in circulation, $517,589,688." "July 1, 1907. Gold in circulation, $561,697,371 "—only an addi- tion in ten years of $44,107,683, or an average of $4,410,768 per year. CUKRENCY LEGISLATION. 59 Now, look at this contrast. During this time the national wealth Df the United States has increased over $28,000,000,000, as shown by the report of the Department of Commerce and Labor for 1907 : It is the total quantity of money iu circulation in any country which deter- mines what portion of that quantity shall exchange for a certain portion of the goods or commodities of that country. It is the proportion between the circu- lating money and the commodities in the market which determines the price. The Chairman. Mr. Daniel. I would like to say this: We have $34 per capita, and Canada has $19 per capita. Is there that much difference in the price of commodities in the two countries? Mr. Daniel. But you have not that much here. It is tied up. Only $19.36 in circulation. The Chairman. But Canada has not got $19 among the people. Canada's total circulation, all they have out, is only $19 per capita, and that includes their reserves, and what is in the treasury of the Dominion, and all. I think they have $10 or $15 in circulation up in Canada, and we have $20. How do you account for the prices across the line up here being the same? Mr. Daniel. If you will make a memorandum of that, I will come back to it. The Chairman. I would like to ask another question, and you can answer them both at the same time. In Belgium they have about $9 per capita and in France $35. Mr. Daniel. France has $40. The Chairman. That is so much the better. Mr. Daniel. I am familiar with all those facts. The Chair3ian. I just wanted to call your attention to that. Mr. McKiNNEY. In Alaska they have a circulation equal to that in the rest of the country, and the prices there are tremendous. Mr. Daniel. A simple statement of fact is enough to show that the gold in our money system is no longer the standard by which the tremendous wealth of the country is measured. The so-called gold standard is a mere fiction of the mind, a pretext for banking systems to issue credit money on. The following paragraph from the report of the Secretary of Agri- culture suggests a comparison : The grand total for 1907 is $7,412,000,000. This is $657,000,000 above the value of 1906. During the last nine years wealth was created on farms in the United States to the fabulous amount of $53,000,000,000. This would buy the whole stock of gold in the monetary systems of the world, December 31, 1906, as estimated by the Director of the Mint, as follows : In banks and public treasuries $3,764,900,000 In circulation 3, 124, 000, 000 It will be seen that the value of one year's products of agriculture, $7,412,000,000, in the United States, is more than all the gold money of the world. The gold outside of the currency system has no effect upon the value of other property, and therefore should not be considered. The value of money in any country is determined by the amount existing. That commodities would rise or fall in price in proportion to the increase or diminution of money I assume as a fact that is incontrovertible. This economic truth is now so plain that he who runs may read. What then becomes of this mere fiction of the mind, that gold is the 60 CURRENCY LEGISLATION. standard of value of other things in this country? In other words, how can only $1,489,742,845 of gold in our currency system, contain- ing $2,876,368,696, constitute the standard of values? Anyone with ordinary intelligence knows that if you were to retire the other kinds of currency in our present monetary system prices of all other kinds of property would experience a tremendous fall. The relative importance of the value of gold and the value of other property is as follows: Total value of gold money in the United States November 1, 1907, $1,489,742,845. Value of other property, $117,304,211,917. Annual average production of gold in the United States, $83,000,000. Annual average production of value of other property, $3,400,000,000. Page 89, Report of the Director of the Mint : The coinage of gold of the mints of the world, outside of the United States, from 1900 to 1906, when figured out, averaged only $211,312,448 a year. The balance of trade due the United States by the outside world in 1907 amounts to $446,489,653, which would buy their total coinage of gold and leave them still in debt to us $235,177,205 a j^ear. To show the relative importance of our internal commerce and our foreign trade, I would call especial attention to a report from the Department of Commerce and Labor dated December 14, 1907, as follows : Internal commerce, United States, 1907 (estimated) $25,000,000,000 Domestic exports, fiscal year ending June 30, 1907_' 1, 854, 000, 000 The above comparison is made to clarify this subject, as our states- men and business men have attached so much importance to this in- ternational trade or foreign commerce idea that they seem to think the whole American system must be made to conform to it. It is a- case of looking so hard at the fly on the barn door that we can not see the barn door, or of the tail wagging the dog. To emphasize this fact, compare the relative positions financially of these countries and the United States, and ask which should domi- nate the future business of the world. 1901-5. Population. National debt. Per capita debt. Great Britain 43,217,687 38,961,950 33,476,120 $6,196,038,685 6,963,953,193 2,490,955,026 $139.52 172 48 France. Italy 79 93 Page 218, Special Report of the Census, 1907 : Measured by national wealth, or the ability to raise revenue, the public debt of the United States is only 27.1 per cent of that of Great Britain, 20 per cent of that of France, and 16.4 per cent of that of Italy. Page 2, Statistical Record, Department of Commerce and Labor: 1904. National wealth of United Stales !j;i07, 104, 211, 917 Page 33, Special Report Census : Estimated Increase to 1907 : 10,200,000,000 Total to 1907 ■_ 117,304,211,917 1907. Internal commerce annually 25,000,000,000 CURRENCY LEGISLATION. 61 Population. National debt. Per capita debt. 1907. - — -. 85,593,303 $878,596,755.03 $10.20 We find the following statement on page 33, Special Report of the Census, 1907: Without financial pauics or other disturbing factors, the figures reviewed would indicate that the census estimate for 1910 if taken on substantially the same basis as the estimate for 1890-1900, and 1904 will show an annual average per capita accumulation of wealth from 1904 to 1910 of not far from $40. This would amount to $3,400,000,000 annually. The taxpayers and those producing this wealth would like their representatives in Congress, to whom they pay annually an aggregate of $3,585,000 for their services, to study this statement and give them an American money system made up of real dollars as authorized by the Constitution, regardless of any other country on earth, and not in the interest of short-sighted banking associations who desire to handle the money of the country and control it as far as possible in order to make the most money out of it for themselves. I hardly think their best friends would call them philanthropists, running banks in the interest of the people. On the other hand, Congress is paid by the people to look after their interests and not the interests of banking associations. Thus the question becomes an individual responsibility upon every repre- sentative of the people in Congress, and not a matter to be settled by a few men on the Finance Committee of the Senate in consultation with banking associations. What the people expect of Congress is a permanent increase of full legal-tender dollars to sustain $117,304,211,917 of national wealth produced by them, and to carry on $25,000,000,000 of internal com- merce. Thev fully realize that a crazy-quilt currency made up of $1,489,742,845 of gold, and only $574,459,080 of that in circulation as real mone3% and the balance of $1,386,625,851 in outstanding obliga- tions redeemable in gold, can no longer support the tremendous devel- opment of this coimtry. It is a condition and not a theor}^ that now confronts the owners and producers of wealth in this country, and the dominant party that shirks the issue will be held responsible for the results. To demonstrate the actual necessity of this, the following condi- tions are set forth : The total amount of monev of all kinds in the cur- rency sysem of the United States November 1, 1907, was $2,876,368,696, a little over 2 per cent of the national wealth of $117,304,211,917, the value of which it is expected to measure and sustain as well as carry on $25,000,000,000 of internal commerce; and, in addition, measure and support the value of the immense issues of bonds and stocks of the corporations of the United States. Those under the head of " Industrials " alone, listed on the New York Stock xchange. and not including railroads, amount to over $8,000,200,941. Those issued on the steam railroads are estimated at 14,765,178,704, making a total of $22,966,119,704. This does not include the innu- merable corporations issuing bonds and stocks throughout the United States. In addition to the above we have the following demands 62 CURRENCY LEGISLATION. upon this stock of money from the depositors of same in national banks, trust companies, and savings banks in the United States, as per last report of the Comptroller of the Currency for 1907, amount- ing to $13,099,635,348. This does not include deposits in building and loan associations. It would be easier for a sensible man to believe all the tales of the Arabian Nights than to think that $2,869,074,255 of money (and by construction of the Secretary of the Treasury, about one-half of that only promises to pay another kind of money) can any longer carry on the business of this country and sustain values. Based upon the $40 per capita of France, a country' that has not half the need, demand, or wealth to redeem her money in as the United States, 3^et the only country in the world free of panics, we should have based upon our present population, December 1. 1907 (86,- 666,000), $3,466,640,000. or an increase of $590,271,304 in our cur- rency sj^stem. The taxpayers now ask their representatives in Congress to get together and give them a plain square deal on this money question stripped of all its sophistry, and to settle it right and allow the legit- imate business of the country to go on uninterrupted by speculations in stocks and bonds by the nonproducers in the stock exchanges, in conjunction with the banks in the large cities. The power to create money rests entirely with Congress as placed there by the people, and if the people are responsible for these dollars they want them issued direct, as perfect money units, and not in- directly as promises to pay through banking associations with the right to retire them whenever they find it profitable to do so. After the present painful experience they are opposed to having this power to issue currency turned over to any system controlled by money lenders and capable of being used as an india-rubber money, under the attractive title of an elastic currency. [Laughter.] This country has not stopped growing nor has it exhausted its boundless resources. AA^iat the people want is more money perrtia- nently in the currency system, to be steadily increased as wealth ac- cumulates and the population increases, and not an emergency, elastic, or champagne circulation to bring about a tipsy prosperity, so enjoj^ed by frenzied financiers, who make fortunes on paper and add nothing to the national wealth, yet coming to a sudden end at any time and absolutely stopping the progress and prosperity of the whole country (now adding to its wealth $3,400,000,000 a year). In opposition we hear men, calling themselves statesmen, hiding their assumed ignorance behind such expressions as " We must not issue ' fiat money ' " — a term without meaning when applied to the material question of an American dollar issued % the sovereign power of the United States with $117,304,211,917 of national wealth owned by the people, who are adding to the same at the rate of $3,400,000,000 a year, and doing $25,000,000,000 Avorth of internal commerce annu- ally, pledged to redeem them, every dollar being a universal order on all things on sale, all services for hire, and the ultimate of payment for all debts in the United States. Is there a sensible man in this the twentieth century who will stand up in the American Congress and say that he would rather have a promise to pay a dollar issued by a bank, secured upon a segregated asset of a corporation, called a bond, than a full legal-tender dollar redeemable in all the property of the CUERENCY LEGISLATION. 63 people of the United States? If a full legal-tender American dollar is called " fiat money," by a parity of reasoning the same statesman would call a United States Government bond a fiat creation, although both have squarely back of them all the assets of the United States and the plighted faith of the American people. Any man calling himself a statesman who can not rise above politics on such a vital question, but who resorts to sophistry and subterfuge, would properly belong to the class characterized by Adam Smith, " That insidious and crafty animal, vulgarly called a statesman, or politician, whose councils are directed by the momentary fluctuations of affairs;" or described by Buckle, " Such men are at best only the creatures of the age, never its creators ; their measures are the result of social progress, not the cause of it." Mr. Weeks. It was suggested that it was desirable to hear from men of all classes on this question — not bankers alone, but other busi- ness men — and I would like to ask Mr. Daniel what his business is ? Mr. Daniel. If you will allow me to be a little personal, I will say that I started out, after the war, from Fredericksburg, Va. I lived in New York for quite a time and also traveled as general salesman for one of the largest commercial houses there — Tefft, Weller & Co. — who did a business of $15,000,000 a year. In looking over the situ- ation, always keeping this money question before me, I came to the conclusion that the best way to make money was to buy some cheap property near the capital of the United States and let its growth enhance its value. For about twenty years I have been in Wash- . ington, and I have now arrived at a point where the increase in the value of my property is sufficient to enable me to pay some attention to the interests of the people, at large. Mr. Weeks. You are a capitalist, then ? Mr. Daniel. I do not claim to be a capitalist because I do not want to arrogate to myself any of the qualities that go along with that position. Mr. Weeks. You belong to the leisure class of the United States? Mr. Daniel. No, sir; I am in the real estate business, and I have been, and am right now, in touch with pretty much everything that is going on. That is all I have to say. I have no interest in this matter beyond the fact that there are 80,000,000 people in this country who have a great deal of property and who are working very hard for it, and they have built up a civilization. They have more wealth than all the rest of the world practically put together, and it is time that they should have something to say about the question. I am simply presenting a brief in their interest. Mr. Gillespie. Have you any remedy that you can suggest? Mr. Daniel. Yes, I have; but I do not think it is time to promul- gate it yet. Mr. Crawford. Your suggestion is to increase the circulating medium by the issue of legal tender greenbacks? Mr. Daniel. I have stated it plainly. We want real money. Do not disturb present conditions, but put more real money in circula- tion. The Chairman. What do you mean by real money — United States notes ? 64 CURRENCY LEGISLATION. Mr. Daniel. I mean the actual money. The Chairman. United States notes? Mr. Daniel. It can not be anything else. Under the Constitution of the United States you can only issue one kind. Mr. Crawford. Do you think, with a gold reserve in the Treas- ury amounting to a total of three hundred and forty-six millions, that it would stay at par ? Mr. Daniel. It would have no effect on it at all. Mr. Gillespie. Do you mean to issue United States notes, making them irredeemable, or redeemable in gold, or how ? Mr. Daniel. When you put out a perfect circulation unit in the country, it is not supposed to be a tiling that is retired. It circulates and stays out. Mr. Gillespie. I wanted to know if that was your idea — the issu- ing of irredeemable paper money by the Government? Mr. Daniel. Not irredeemable money, but redeemable in every- thing, backed by the national assets of the Government and people. ]\Ir. Gillespie. But if it is not redeemable, why have assets back of it? Mr. Daniel. For instance, when the Congress of the United States, representing the American people, isues a dollar, it is by my consent that I take it in paj^ment for any property I have or in payment for any service I render, and it is a thing that the American people accept and agree to redeem not only now, but for all time. That is a perfect money unit. Mr. Waldo. You have got to have it redeemable in gold, though. Mr. Daniel. Not redeemable in any one thing, but everything. Mr. Waldo. I mean to do business with any other country on a gold basis. Mr. Daniel. We do not need that. We have only had a differ- ence of about forty-seven millions in seven years in exports and im- ports of gold. Mr. Waldo. But you have got to fix that some way, have you not ? Mr. Daniel. I am glad you have asked that question. Wlien I was in England I went down, for instance, to the Morgan bank, and I handed in a $100 American silver certificate or Treasury note, and I got a premium on it — something like $1.50 or $1.75. I went over to Belfast and bought $175 worth of linen there. I handed my money into the bank at Belfast and got a premium on it. Last summer I was over in Italy, and they are crazy after American monej'. They will tell you it is the best money in the world. They do not question it for an instant. Why, the influence of this country to-day is the most potential in the world, as demonstrated bj^ the fact that they are paying us a premium on money right along without regard to whether it is gold or silver. Why do they need it? They need $440,000,000 of it to settle the balance of trade with us every year. They need it to pay for $1,854,000,000 of stuff — necessaries of life, most of it. They can not get along without it. I stopped off at the Straits of Gibraltar and got all my foreign money changed into American money, and of course to get American money I had to sacrifice quite a discount. The fellow gave me a whole lot of nickels. A party got on at Gibraltar with a lot of grapes. Two or three Spaniards were standing around, and I took, out five of these nickels and handed them out for the grapes. This CURRENCY LEGISLATION. 65 fellow looked at it for a while and turned around to his partner and said, "What about that?" The fellow said, "That is American money ; the best money in the world." That is the universal thought. Why? Because we have $117,- 000,000,000 of national wealth, with the b(«t things in God's world to reinvest the money in. Railroad bonds and everything are here to redeem it in this country ; as good as can be found anywhere. Mr. Weeks. Did you say you v;ere paid a premium on American, money ? Mr. Daniel. Yes. Mr. Weeks. Where? Mr. Daniel. In London and in Belfast. Mr. Weeks. Who paid it? Mr. Daniel. Cook paid it in Belfast and the Morgan bank paid it in London. Mr. Weeks. How much premium were you paid ? Mr. Daniel. I think I got 6 shillings on the $100. That was about $1 and Mr. Weeks. Was that in gold or bank notes? Mr. Daniel. Both. Most of it was in gold. Mr. Weeks. The payment was made indiscriminately? Mr. Daniel. Yes. Mr. Weeks. And a premium was paid on it? Mr. Daniel. Yes. The Chairman. In London ? Mr. Daniel. In London. I tell you it is a fact that there is some exaggeration about that idea of gold being the necessary thing. It took me a long time to reach this conclusion. I was timid for four or fi\e years about taking this position, but I find that I can not, as a sensible man, take any other position. The Chairman. Is any other gentleman to be heard to-day? Mr. Daniel. I want to say, gentlemen, that I am very much obliged to you for the opportunity of being heard. I thought I had better come before you, as so few people do come. I want to com- pliment any man who has given time and thought to this subject, because few people have; but it is such an important thing that it is high time the American people should take it up and thrash it out. The United States Government should kindly request the banking corporations to cease to occupy the middle of the economic or busi- ness stage of this country. The power to issue money is a sovereign function of government and through money the value of trade, com- merce, and property is regulated. It is therefore of the first impor- tance that banking corporations should be confined to their legiti- mate business as lenders of money owned by their depositors and not be allowed to control the measuring medium of property. The Constitution of the United States does not contemplate the Government going into the banking business to loan money to indi- viduals or corporations, or that the banks should ever go into the governing business by issuing or controlling the supply of money and regulating the affairs of the country. It is plain from the action of the banks in the panic of October, 1907, that they need no guar- dian to look after their interest. They simply stopped payin^ their depositors, issued them clearing house certificates and scrip, held and hoarded all the money of any kind the}^ could obtain. They ceased. 37381—08 5* 66 CURRENCY LEGISLATION. to make loans, but demanded money on the loans outstanding, and asked larger curtails on negotiable notes with renewals for only thirty daj'S and increased the rate of interest on call and time loans. The effect being to instantaneously stop the progress of business, causing infinite distress and irreparable loss throughout the country. Thus the magnificent procession of business is stopped, its step re- versed, depression takes the place of prosperity. Not being able to use the old excuse of the country being over- stocked, as the cause of this panic, the wiseacre economists, getting their wisdom from the superficial financiers, say we have overtraded^ The fact is well known that the demand for everything, as well as money, is beyond the supply. Such a prosperous condition in the country generally is the underlying reason for the people standing the strain as well as they have. In the meantime money goes up in value, causing a great depres- sion in the value of other property, thus putting those in possession of money in 2:)osition to take advantage of the misfortune of others. It is an open secret that the funds of most of the banks in the large cities are controlled by inside rings, composed of officers of the banks, who farm out the money to the best advantage to themselves as well as that of the banks. While the hoarding process goes on the little interest lost in dividends to the stockholders does not amount to a drop in the bucket compared to the immense profits made by these men out of forced sales that they take advantage of. The effect of this fall of prices upon the whole country is a hun- dred per cent w^orse than the immediate loss. It is human nature to hold on to the thing that is going up in value — money — and let go of the things that are consequently going down ; this intensifies the situ- ation, making the inadequate supply of money that causes the panic scarcer still. Superficial observers complain during this condition that the peo- ple are hoarding their money. As a matter of fact, in the present panic the Comptroller of the Currency in his last report states that the banks are doing most of the hoarding. There never was a panic that hurt the owners or controllers of money; such conditions are a harvest for them and offer a premium on money (and meanness). The only cure for this condition is an adequate addition of money — so as to arrest the general fall of prices; as soon as this is done money will seek employment. If the business of a country develops and commodities increase, and the amount of money remains the same, it is contraction in the worst form, because to take care of the increase of property and wealth a credit system of promises to pay, checks, etc., is built up so high that it is obliged to break down for the want of a broader foundation or more money to sustain it. The United States should steadily increase in business and wealth, as its resources are practically unlimited and supply everything necessary to the human family. It can therefore be stated as an economic fact that a scarcity of money in such a country will always cause panics, while a sufficient amount of money to keep pace with its growth, increase of wealth and population will bring a prosperity that will continue indefinitely. If purchasing power was commensurate with the productive power of the people of this country we would have a continuous prosperity CURRENCY LEGISLATION. 67 and an increase of national wealth that would be the admiration of the world. As it is, purchasing power can only be obtained through the command of money or its representatives. As long as this money consists only of a scarce commodity, in itself absolutely inadequate to perform the service expected of it, the break between productive power and purchasing power can not be filled up. Jonathan Duncan recognized the real nature of such a crisis. "We have shown that in the natural state of things production can never exceed consumption, and that what is called overtrading in goods really means the underproduction of money. It means that more commodities are brought to market than can be distributed, not be- cause people do not want them, but because the instrument of distri- bution is incommensurate. If the Avharves of a maritime port were chocked up with goods which another country desired to possess, as, for instance, corn at New York needed in England, but that there were insufficiency of ships to freight the corn to London or Liver- pool, it would be very illogical to say that the Americans had over- traded in the production of corn ; the case would be one of underpro- duction of vessels, manifesting the absence of the instrument of distribution. A railway station further illustrates the argument. If there were more passengers than the train could carry, the directors, looking to their own interest, would not insist that the passengers were ex- cessive, and complain of overtraveling, but decide that the means of conveyance were inadequate, and at once increase the number of cars and locomotives. The question, then, amounts to this : Would there he any glut of produce if money were permitted to increase as fast as produce increased ? But we may certainly answer this question in the negative, and the answer subverts the whole of Mr. Lloyd's theory. AVhence arise the convulsion, pressure, and stagnation which Mr. Lloyd pronounces inevitable, and as certain to recur periodically in established cycles ? Surely not from the reluctance of hungry people to consume food, or from the refusal of people in rags to wear warm and decent clothing; yet we are told all the evil proceeds from the fact of those very people having been too industrious; they have overtraded, they have created too much, and the penalty is famine and nakedness. Under this theory, the conditions of the productive classes is truly pitiable; if idle, they are treated as rogues and vaga- bonds ; if industrious, they are deprived of bread. We speak of overproduction of clothing in a world in which mil- lions have not half as much clothing as they need. " Too many shirts ? Well, that is a novelty in this intemperate earth, with nine hundred millions of bare backs," says Carlyle. This panic has given the financial rigors to all the bankers; they realize that with only $2,870,368,696 in the currency system of this country and only $1,679,853,760 in actual circulation' they had to take care of over $13,099,635,348 owed to their depositors and at the same time provide the money necessary to carry on $25,000,000,000 worth of internal commerce. It is safe to say that if the country had not been in a prosperous condition, and the American people" in a pleasant frame of mind, half the banking institutions in the country would have been closed or in bankruptcy caused by an angry and out- raged people demanding their money. 68 CURRENCY LEGISLATION. Let this occur again under different conditions and a general panic seize the people; it will spread like wildfire through those having on deposit $13,099,635,348 in the banking and saving corporations of the country, and if one-fifth of them get their money it will exhaust every dollar in the whole currencj- system of the United States, or one-lwelfth will take every dollar in actual circulation. After the lesson of this panic, which caused an expose of the utter inadequacy of money to meet demands, it will not be wise for the representatives of the people to deal longer with makeshifts while such serious conditions confront the people at large. As we are living under a written constitution, and the will of the people is the supreme law of the land, in contradistinction to all other forms of government, it is useless to copy or imitate banking or cur- rency systems of any other country. If it were not out of place it could be shown that the money lenders and banking systems of the old world have caused more poverty and prolonged suffering among the people than war. I have visited these countries in recent years and studied their conditions from a financial and economic stand- point, and will say we want none of their banking systems imported into this countr3^ Their money systems mean the increasing domina- tion of capital over labor, and the enhancement of the value of money. The great oversight made by the bankers of this country is the tremendous advantages the United States has over the rest of the world in its resources and productive capacity. In cultivating a foreign market for the sale of stocks and bonds they have lost sight of the fact that if we had an adequate amount of money in our currency system, the handling of same by them in developing the tremendous resources of this country would make legitimate banking more profit- able than ever before, and create among the people a better market for bonds and stocks than can be found abroad, and the interest on these American securities would be kept at home and deposited in American banking associations. The American Constitution is the nearest realization in the con- crete of the principles of eternal justice ever applied to human gov- ernment, and this money question should be made to square with the Constitution in the interest of the American people. Banking asso- /"iations and money lenders should be a secondary consideration. From the days of Aristotle to the present hour all intelligent thinkers on the subject know that money is a creation of law. The vital ques- tion now is one of more money to keep pace with the immense growth and development of the country. Therefore it is useless to try to settle this question by discussing it from the premises of banks and pi-omises to pay issued by and controlled by banking associations. I>aiiks are organized by individuals to handle and loan the money of de|)ositors. not to create money; this is an act of sovereignty, a fund ion of government. With this fundamental principle of our form of government recog- nized, as it must be, a sufficient amount of full legal-tender dollars, the best money in the world, can be supplied with mathematical precision to our monetary system. At a great expense our Government has eslablisherl the Census Bureau, Department of Commerce, and Labor, liiireau of Corj)oiations, Interstate Commerce Commission, etc. These rlnpartments, m connection with the Secretary of the United States CURRENCY LEGISLATION. 69 Treasury, Comptroller of the Currency, and Director of the Mint, can supply all necessary data upon Avhich sufficient addition of money can be supplied and regulated on a percentage basis by the Congress of the United States, according to the increase of wealth, business, and population. Thus the most perfect monetary system could be estab- lished ever known to the human family, as it would be in the interest of the whole people, and at the same time a fair standard of value between buyer and seller, and preserve the equity of time contracts between debtor and creditor. Mr. Chairman, before closing my argument in regard to the ques- tions asked at a previous hearing as to the redemption of the full legal-tender American dollar, a simple illustration may best explain it. A has a hundred-dollar legal-tender note. B has a horse, which A values at $100, and he closes the purchase ; the horse redeems the $100 note so far as A is concerned. B then desires to pay a debt of $100, and the hundred-dollar note is then redeemed by the debt so far as B is concerned, and the process goes on ad infinitum, these legal- tender dollars being a universal order for all things on sale, all serv- ices for hire, and the ultimate of payment for all debts. Answering the chairman's question as to prices in Canada being the same as in the United States, am constrained to say he has been misinformed. I'he general level of prices in Canada is fully 20 per cent lower than in the United States. To my mind it is a self-evident proposition that the purchasing power of a dollar or money unit is not any so-called intrinsic value in the dollar, but the competition of all men to get dollars, and if the number of dollars do not keep pace with the growing demands for dollars, their value w^ill increase and greater sacrifices will have to be made by the people to get dollars, demand operating against supply. To deny the quantitative principle in money is simply questioning the law of supply and demand, which is as universal as the law of gravitation. Since the panic of October, 1907, there had been forced into the currency sj'stem a temporary increase of money, viz. the coinage of $10,364,720 of gold in October, $33,840,060 in November, and $12,- 929,085 in December, 1907. And in addition to this an increase of bank circulation -on Panama bonds issued and Government certifi- cates of indebtedness. The people must not be misled by statements putting the per capita of money at $35 as of this date, as it is only temporary and an unfair way of putting it. To make this plain I refer again to the Report of the Comptroller of the Currency for 1907, page 48 : Of the total stock of money in the country 11 per cent is held in the Treasury as assets, 35.51 per cent is in reporting banks, and 53.49 per cent elsewhere, the per cai)ita not in the Treasury or banks in 1907 being $19.36, or $1.03 less than in 1906. Owing to the scarcity of money, $112,535,852 in gold was imported into this countrv, yet only $57,133,865 has been coined into money up to December 1, 1907. This would make the coinage account stand as follows (letter re- ceived by me from Director of Mint January 3, 1908) : Coinage exe- cuted at the mint during the calendar year 1907. $131,907,490. Deduct amount of this coined up to the ending of the fiscal year, 70 CUBRENCY LEGISLATION". July. 1907, of $79,622,337.50. We put to the credit of the next fiscal year, 1908, $52,285,152.50. Ahhough the Secretary of the Treasury and the Comptroller of the Currency both admit there was no lack of warning indications of financial troubles and possible business disaster for the last year or two, and these conditions must have been well known among the financiers of the large banks in New York, with whom these officials of the Treasury were in close business relations, it is therefore passing strange that nothing was done by them to protect the people against such a crisis and the loss of untold millions. It is a question of more money. The Comptroller of the Currency admits it on pages 66, 67, and 68 : For at least ten or twelve years there has been an era of advancing prices and great industrial, commercial, and speculative activity in all the countries of the world. Credits have increased and multiplied until the limit has been reached in the amount of reserve money on which they must be based. * * * * . * !)l 1^ The difficulty in selling bonds has become so great that for several years many of the railways have had to raise money for their necessary expendi- tures and improvements with so-called short-time notes, instead of regular bond issues, the rates of interest on such issues rising higher and higher and each issue being harder to place. Merchants and manufactui'ers of the highest standing and credit have found it more and more dilflcult to secure or renew loans and the rates have risen steadily for months past. On October 26 the New York clearing-house banks decided to issue clearing- house certificates for use in the payment of balances, and to limit, if not sus- pend, the shipment of curi-ency to out-of-town banks. In this the New York banks were followed by those of the other central reserve and most of the reserve cities. The result was to at once precipitate a most serious bank crisis and a famine of curi-ency for pay rolls and other necessary cash transactions. All domestic exchanges were at once thrown into disorder and the means of remittance and collection were almost entirely suspended. Money has been withdrawn and hoarded by individuals, corporations, and even more, perhaps, by the banks themselves, all of whom at once drew and held all the money of any kind they could obtain, often really in larger sums than needed. Factories have suspended, workmen have been thrown out of employment, orders ha^•e been canceled, the moving of crops has been greatly retarded and interfered with, and exports have fallen off at a time of the year when they should be at their highest. Another result has been a reduction of the volume of the foreign credits available .iust at the time they are more needed to offset the large imports of gold which have been made. ******* The conditions which led to the panic of October and November, 11)07, were not due to the failure of a few individual banks. They were not due to the lack of confidence of the people in the banks, but more to a lack of confidence of the banks in fiiemselves and their reserves. Banks have been fearful that the reserve system would break down, and in consequence it has broken down, and the reserve de])osits have been only partially available. They were also fearful that not sulliclent money could be supplied to meet the demand, and as they all made tlie demand at once there Ims not l»cen snilicient money. The result has been a money famine. The noniia] (i'cihI of gold is shown by the following coinage of the mints of the United States and the world (p. 15. Director of Mint, 1907) for the fiscal year.s — lOfK) iflOT. a",7, no. 00 l in04 $20S, bis, 642. oo 1001 !•!), Od.'-., 7M. 00 1005 79,083,692.00 1902 01,080,572.00 1906 53.002,097.50 3903 45,721,773.00 11907 79,622,337.50 CURRENCY LEGISLATION. 71 By reference to Statistical Record of the Progress of the United States, Department of Commerce and Labor, page 3. it will be seen there, under head of " Money in circulation."' there was no increase in circulation of gold from 1900 to 1907. By reference to page 81, 1906, Report of the Director of the Mint, we find the " Estimated stock of gold in the United States" for the fiscal years — 3900 $1,034,439,264 I 3903 $1,249,552,756 1901 1,124, 652. 81S M904 1,327,672,672 ]902 1,192,395,607 11905 1,357,881,186 Director of Mint Report for 1907, page 93 : 1906 $1,368,612,051 | 1907 $1,328,768,271 A net decrease in last fiscal year of $39,843,780. Report Director of Mint 1907, page 102 : 1873 coinage of gold in tlie mints of tlio world " $257,630,802 1905 coinage of gold in the mints of the world 245.954,257 After a lapse of thirty-two years a falling off of $11,676,545 in the coinage of gold in the world. Report Director of Mint 1907, page 2 : 1897 coinage of gold in the mints of the world $437,722,992 1906 coinage of gold in the mints of the world 366,326, 788 After a lapse of nine years a falling off of $71,396,204 in the coin- age of gold in the world. Report Director of the Mint 1906. Stock of money in European banks, notes in circulation, December 31. 1905 — England. France, Germany, Scotland, Ireland, Austria-Hungary, Belgium, Bulgaria, Denmark, Spain, Greece. Netherlands. Italy, Sicily. Norway, Portu- gal, Roumania, Russia, Finland. Servia, Sweden. S^vitzerland — all now designated as gold-standard countries. Total of gold, $1,867,- 661,000 (decrease from 1904 of $12,352,000) ; total of silver, $525,- 153,000 (net decrease from 1904 of $17,370,000). Notes in money systems December 31, 1905, $3,660,245,000 (net increase over 1904, $321,152,000). Now, being so-called gold-standard countries, we must add the silver to the notes, and the total Avill be $4,185,398,000 of notes to $1,867,661,000 gold. Percentage of gold to other kinds of money in European countries, 44 per cent. Gold in the United States money system as per last revised report of the Director of the ]\Iint, United States, page 93, for June 30, 1907, $1,328,768.271 ; other kinds of money, $1,679,473,312. Percentage of gold to other kinds of money in United States. 79 per cent. Upon the basis of European countries. 44 per cent, the United States based upon the gold in its money system, $1,328,768,271, would be entitled to an increased issue of notes of $1,296,967,615, or a total stock of money in the United States of $4,305,209,198. Percentage of gold to other kinds of monev in France. 51 per cent : Gold, $555,454.000 ; other kinds of money, $1,088,713,000. Upon the basis of France the United States would be entitled to an increase issue of notes, based upon its gold money, of $1,164,090.- 787; or a total stock of money in the United States of $4,172,332,370. Based upon the banking principle of 25 per cent of cash to credit the amount due depositors in banks, trust companies, savings banks, 72 CURRENCY LEGISLATION". and building and loan associations, United States, a total of over $15,000,000,000. Twentv-five per cent of this amount would be $3,750,000,000. COMPARISON. After eight hundred years we have the following condition in the United Kingdom, 1904^5: Area, United Kingdom, 121,371 square miles: population, 43,217,687. England's national debt, $6,196.- 038,685. Gold in banks, public treasuries, $196,400,000 : in circulation, $290,300,000: total, S486.700,000. or 7 cents on the dollar of national debt. France, after eleven hundred years: Area, 207,054 square miles; national debt. $6,963,953,193. Population, 39,300,000. Gold, $555,- 450,000, or 8 cents on the dollar of national debt. Xow hear the case of the United States of America. Area, 3,624,122 square miles; population, 86,666,000. After one hundred and thirtj^-one years: National wealth, $117,304,211,917; annual in- crease, $3,400,000,000. Internal commerce, $25,000,000,000. Foreign exports, $1,853,000,000, and enough gold in the money system to pay off her national debt and ha ^e more left over than any other country has in its monetary system. Upon this showing the American people have the right to demand an immediate increase of money. For thirty-five years they have patiently waited for the Congress to settle this mone}^ question upon a logical and sensible basis. They have suffered the results of make- shift legislation resulting in panic after panic. And now they find the magnificent prosperity of this country has been legislated into a financial blind alley, and more makeshift legislation is suggested. As a practical man familiar with the causes and temporary cures effected by the issue of credit currency, I do not hesitate to say that if the Congress of the United States would authorize the issue of five hundred millions full legal tender American dollars to the mon- etary system and to be gradually placed in circulation through the appropriation committees of Congress in the same way that the money received from the taxes of the people is again j^ut into circu- lation, the passage of such a bill would act like magic upon the whole business conditions of the country, and prosperity would be upon us again. Congress can then take up the question as to the proper amount of money the monetary system of the United States should have to meet its marvelous development. The CiiAiKMAN. Is there any other gentleman to be heard now? Mr. II.AYKS. I see that we have Mr. (Jompers with us this morn- ing, and 1 shoiiM like to henr from him if he has anything to say on the subject. STATEMENT OF SAMUEL GOMPERS. ESQ.. PRESIDENT OF THE AMERICAN FEDERATION OF LABOR. Mr. Go.MPKHS. Mr. (Jliairman and genlleinen of the committee, I came here for the purpose of meeting a member of the committee, and I have not come |)rei)ared to discuss any featui-e of the financial I»robl('m. or to -submit anv solution. I ;i in free to admit that after CURRENCY LEGISLATION. 73 very many years of o-ivino^ the subject of money and its issuance the best thought and consideration I could, T have not yet solved the problem, even to my own satisfaction. I believe that we must meet the new conditions which confront us as a people and as a nation, and that many old conceptions must give way to new conditions. Yet I can not escape the thought that the provision of the Constitu- tion ought to have a little more weight than has been given it in re- cent years — that is, as to the power of the issuance of money. The delegation of that power to private interests is something that, in my judgment, is not sustainable by the proper interpretation or con- struction of the constitutional provision that the Government of the United States is the duly constituted authority for the issuance of money. I am not given to haphazard criticism, but this thought that I shall submit in a moment has been with me for many years; and inasmuch as you have asked me whether I have anything to say, and as I am now on my feet, I think I ought to say it. It never struck me as quite the fair thing for the Government to issue interest- bearing bonds, and to permit certain persons organized into an asso- ciation called a banking institution to buy these bonds from the Gov- ernment, to receive interest thereon, and then by depositing these bonds with the Government to issue for many years 90 per cent of bills Mr. James. One hundred per cent ? Mr. GoMPERS. Yes; 100 per cent. I said for many years 90 per cent, and recently by, I think, the act of the Fifty-ninth Congress Mr. Gillespie. The act of 1900? Mr. GoMPERS. Yes ; by the act of the Fifty-seventh Congress it was increased, so that to the full face value of those bonds — that is. 100 per cent — by authority of the Government the power is given to these associations and banks to issue bills and to secure upon these bills all the interest and return that can come from them. It has the people, coming and going, paying interest upon these bonds lodged with the Government, and the bank (as if there had been no money transaction at all. and as if it had kept its, say, $1,000,000) receiving the interest and then issuing its original money, or what is equivalent to it, and receiving all the advantages that come from the use of this million dollars. Mr. Powers. Might I ask you a question right there? Mr. GoMPERS. Yes. I will not promise that I shall be able to answer you. however. Mr. Powers. Do you object to this on the ground that it affords the bank an unwarranted privilege of making money? Mr. GoMPERS. Yes, sir. I believe that the bank is entitled to the same interest upon the bond that every other citizen is entitled to receive, but it ought not. in my judgment, as a matter of justice and equity between man and man, as between the citizen and the nation, to have the privilege of using that same money or its equivalent for the purpose of a double profit, that profit being entirely out of pro- portion to the interest, perhaps, which it receives from the Gov- ernment. Mr. Powers. Have you ever taken pains to compute how much, in ordinary times, a bank can make by issuing its money in that way ? Mr. GoMPERS; No, sir; I have not. Sometimes you people talk about millions and billions, and you make me dizzy. 74 CURRENCY LEGISLATION. Mr. PowEES. Is it or is it not a fact that the majority of the banks in this coiintry^ — I use the term advisedly — declined, many of them, to buy bonds and take out any more of that currency than they are absolutely compelled to, because they can not make a fair profit on it? Mr. GoMPERS. A fair profit on what? Mr. Powers. On the transaction of buying bonds and taking out currency? Mr. Weeks. You mean on taking out circulation ? Mr. Powers. Yes; taking out circulation from the bonds. Do not a great number of the banks absolutely refuse to avail themselves of the privilege of taking out any more than the Government compels them to take out. because there is nothing to be made out of it ? !Mr. GoMPERS. Maj'be that is true, but it does seem, upon the sur- face, to be an unfair transaction. Now, let me put it in this way Mr. Powers. Yes. !Mr. GoMPERS. You issue a bond. Mr. Powers. Yes. Mr. GoMPERS. And I buy it. ]Mr. Powers. Yes. ]Mr. GoMPERS. You pay me, saj^, 3 per cent. ^Ir. Po AVERS. Three per cent ? Mr. Go:mpers. Well, say two and something Mr. Powers. But the interest that you get after paying the premium on the bond is one and something. Mr. Gompers. You pay me interest upon that bond, and then I deposit with you. Sir. Powers. I understand. Mr. Gompers. And then upon the money with which I buy that bond you give me authority to use an equal amount for the purpose of business transactions. Mr. Powers. Now, I want to ask this. The 2-per-cent bond which is principally used for banking now sells for 104^, so that the inter- est the Government pays to the man is something less than 2 per cent. Now, if I take out circulation on $100,000 of bonds I get $100,000 of circulation. If I am in a reserve city I can loan $75,000 on account of taking out that circulation. The law compels us to keep a reserve of 15 per cent of the money in a reserve city, and 25 and 20 per cent in other cities, behind the circulation that we can not loan. The banks are compelled to pay for the dies and for the printing of the bills and reissuing the circulation, and the interest on the bonds is so small that when you figure it up, in my judgment, there is no money in it. Every bank that I am connected with but one Mr. Gillespie. There is no reserve required against the notes. It is a 5-per-cent redemption fund. Mr. Powers. Yes: and every bank that I am connected with but one utterly declines to take one particle more than they are compelled to. The law compels us to take out a certain amount, and that we take. There is no monev in it. Mr. Ja.mks. I would like to suggest to Governor Powers and to Mr. Crompers that these bonds that they purchase from the Government are exempt from taxes — State, county, and municipal. Mr. Powers. If they were taxed the tax would be more than all the interest, I believe. T think. Mr. Gompers. you will find if you investi- gate that there is no bonanza of wealth for the banks: that the fact CURRENCY LEGISLATION. 75 that they are compelled to buy a certain class of bonds and to pay so high a premium to get them, that they get so little interest, and then have to keep a 5 per cent reserve against them, and pay all the other incidental expenses, leaves no great bonanza for the banks. Mr. GoMPERS. But the opportunity of turning the money over and over again Mr. Powers. The banking act compels us to purchase these bonds and to take out circulation, and the object of that, when that banking act was passed many years ago, was to furnish a means Avhereby the Government could fund its debt, and could take care of its debt; and hence this national-banking system that we now have was created for a twofold purpose. One object was to give currency that would be sound, and the other was to enable the Government of the United States to care for the debt; and hence all banks organized under it were compelled to buy bonds and take out a certain amount of circu- lation. They are compelled to do it, and I apprehend that many banks to-day would not take out a dollar if they Avere not compelled to. Mr. GoMPERS. In other words, there is much less advantage than is popularl}'^ supposed ? Mr. Powers. Very much less. Mr. GoMPERS. But there is no question of its absolute unfairness, and I think it is an improper course. Mr. Powers. I think there is a question about that. Mr. Gompers. I would like to take the position of the Yankee, who, when asked a question, turns questioner. IVIr. Powers. Certainly. Mr. Gompers. A few weeks ago I took occasion at a public gather- ing to say that whoever might be charged with the responsibility for our money panic, I thought I was right in claiming that no blame of that character could be laid at the door of the working people of the country ; and I would like to know Mr. Powers. I think it was a rich man's panic, myself. Mr. Gompers. I would like to know whether in the judgment of the gentleman I w^as right? Mr. PoAVERS. I think it was a bankers' panic. Mr. Gillespie. Did you not advise the laboring people not to with- draw their deposits? Mr. Gompers. Yes, sir. I not only advised them not to withdraw their deposits from the institutions in which they had any savings, but I advised them if they had any hoarded at all to deposit it. I felt it was safer in the financial institutions of the country than in the home, or in the safe-deposit companies. An officer of one of our great trade unions. Mr. Perkins, the president of the Cigar Makers' International Union, perhaps one of the richest organizations of labor in America, was asked what the local officers of the unions should do in regard to the present financial situation. I ought to say that through a magnificently devised system of finance in that organiza- tion the funds are held under a dual condition or system. The entire fund of the organizations throughout the continent of America is the joint property of every member of the organization on the continent ; that is, it is one fund, and yet it is held in the local treasuries subject to the direction of the duly constituted officers of the organization, based upon a system of safeguards that have been 76 CURRENCY LEGISLATION. proven to work out excellently. Many of the secretaries wrote in to the office of the president of that organization asking what should be done and whether the various local unions, throughout the country, ought to withdraw their funds. His answer was " let the money be where it was before this panic came upon us." That is not the mere passing statement of a man without responsi- bility. Here was an executive officer of an organization with over four hundred branches throughout the United States and Canada and Cuba and Porto Eico, telling the men intrusted with the financial affairs of the organization to keep the money where it was and not to withdraw it ; that it was better to take the chance, and that it would be helpful in tiding over the awful stringency, while on the other hand the withdrawal of it would simply accentuate it. So that has been the policy all the way through. I do not know of any union workmen, as individuals, who, if they had a dollar deposited any- where, withdrew it. As a matter of fact, these men in the labor unions discuss finance sometimes; they discuss economics; they dis- cuss the history of nations, and the policies of parties. They do not act simply upon their own judgment, each one for himself, but the judgment obtained is the majority opinion; not by actual vote, but by the judgment expressed. A man who has an opinion brings it up before a local organization and it is discussed in open meetings, per- haps public meetings, mass meetings, and there is a degree of inter- dependence, a degree of higher education as to a man's duty to his fellows, that is not possessed by the nonunion man, whom I have never denounced, but whom I have criticized for his lack of judg- ment ; who, being outside the pale of the organization, wants to reap all the benefits that organized efforts have secured, yet does not want to share any part of the responsibility. As a consequence he is unin- formed, comparatively speaking; and he has no conception of his duty to his fellow-man. I find that I am really talking before the committee. It was not my intention to do so. Mr. "Weeks. I want to call Mr. Gompers's attention to one other matter in connection with the issuing of circulation, because the state- ment he has made is one that is very often made, and one which I think is not justified by the facts. That is, the impression prevails that banks make a large profit in issuing circulation, (xovernor Powers's statements would indicate that that is not true; but there is another point in connection with that: The banks hold about seven hundred millions of 2 per cent bonds. If those bonds were selling upon the market, if the banks were not obliged to buy them, they would sell on about a 8 per cent basis — I mean, assuming that they bore the same comparative value to other Government securities. That seven hundred millions of bonds on a 3 per cent basis would cost the (lovernmeut seven millions more a year than they do on the 2 per cent l)asis. In other words, the fact that the banks aVe obliged to buy those bonds, or a large percentage of them, under the law, enables the (iovernment to save about seven millions a year, which is saved to the people, of course. That is something that is not generally taken into consideration in connection with this question of the banks issuing circulation and making money out of it. As a matter of fact, they make abont one-half of 1 per cent — ^one-half to three-quarters of 1 per cent — on circulation in normal times, and thev tak(^ their chances on CURRENCY LEGISLATION. 77 losing on the principal, on the price of the bond ; for they buy it at 105, perhaps, and sell at 102. Mr. GoMPERS. I have never yet inquired, and I would like to know, what is the profit either to the Government or the banks by reason of the loss or destruction of money ? Mr. Hayes. The Government gains the full benefit of it. Mr. GoMPERS. I mean when bills are lost ? Mr. Hayes. The Government gains the full benefit and not the banks. Mr. McCreary. The Chemical National Bank has a capital now of $3,000,000, as I understand. They have only taken out $50,000, the very minimum of bond circulation; and that shows, you know, that the banks themselves do not figure that there is any benefit in it or any profit. Mr. Waldo. They never issued any of it ? Mr. McCreary. They never issued a cent of it. They hold $50,000 of Government bonds, so as to conform to the law. They come under the banking act, but they have not issued any circulation. Mr. Powers. Is it not a fact that very many banks take no more than they absolutely have to? Mr. McCreary. That is one trouble with the issuance now\ Mr. Hayes. Along that same line I want to suggest, Mr. Gompers, that it seems to me the matter is fully settled by this consideration, which I guess nobody will deny, that the national banks of the United States at this minute could take out something like $300,000,000 more circulation than they have just by presenting the bonds and request- ing it. If there was any profit in it for them do you not think they would be sharp enough after it to do that thing? Mr. Gompers. Well, they have the reputation of being, Mr. McCreary. The bonds got up to 109, and 107^ asked, and sold at 107, and they are down now to about 104 and 104^. So that is, of course, an element to be considered in bond circulation. Mr. Glass. Mr. Chairman, if we are here to devise a currency sys- tem or to correct the deficiencies of the present currency system, would it not be pertinent to inquire if the facts stated by Governor Powers and these other gentlemen here do not in themselves discredit the present currency system that we have ? Mr. Hayes. I think they do. I agree with you. Mr. Glass. Is it not a fact that the Government bonds, by reason of this miserable system we have, acquire a fictitious value, and that for that reason the banks do not take out circulation enough tb transact the business of the country ? Mr. PoAVERS. One of the principal objects, in my judgment, of the banking bill, as formulated by the Secretary of the Treasury, was the 10 per cent tax on issuing bank bills from States. The object of the bill was to afford a place where the Government could fund its debt, and could get rid of its debt, and I want to say as to that that it has worked, and they have builded better than they knew. As to that, it has worked admirably. It has enabled the Government to refund its debt a number of times, upon a lower rate of interest, until, owing to the fact that the bonds have become necessary for banking, our Government has borrowed and is borrowing to-day at a much lower rate than any government in the world. 78 CURRENCY LEGISLATION. Mr. Glass. And at the same time has created a condition of pros- tration in the industries of the country. Mr. James. One advantage which the national banks have, which you did not touch upon, Mr. Gompers, is that the Secretary of the Treasury has been depositing many millions of surplus gathered from the people by taxation in the various national banks, and no interest charge at all has been paid for the use of the money; and that is an advantage of no mean importance. Mr. Powers. I want to say right here that I hope somebody will bring in a bill charging 2 per cent on those deposits. I want to vote for it. Mr. James. In the Fiftieth-eighth Congress an amendment of that character was presented, and it passed the Committee of the AVhole, but after that was done the majority did not see fit to move or report to the House. Mr. Crawford. Mr. Gompers has made a speech now, and of course we are interested in it. I would like to ask whether or not, as a rep- resentative of the labor organizations, he has any suggestions to make as to remedial legislation ? The Chairman. I do not know whether he came prepared to speak, or whether he would want to come at some future day. Mr. Gompers. Perhaps I might do that. The Chairman. That would give him a chance to think it over. Mr. Gompers. As the chairman knows, I did not come with the anticipation of appearing before the committee. In fact, I was not aware upon mv entrance into the room that the committee was in session this morning. Mr. Waldo. The main thing is this : This committee wants to hear from representatives of labor, and from every other interest in this coimtiy, any suggestion which they have to make that they believe will improve the present currency sytem. That is what we want. If you will do that sometime I would like to have you do it. Mr. Gompers. I will do the best I can, I am a very busy man. I do not know that there is any busier man anywhere. I do not sup- pose anj^thing that Congress can do will be the acme of perfection. You can not help it. All of us have our weaknesses and our strength. We are not in ourselves perfect, and as an aggregation our imperfec- tions may come out still more strongly ; but I think it is desirable that something be done to prevent these constantly recurring financial dis- turbances. In this instance the panic of 1907 stands out conspicuous from every other financial or industrial panic from which our country and our people have suffered. The Chairman. In what respect? Point it out. Mr. Gompers. Because at no time did the financial panic strike the people when the people were so prosperous in industry and commerce, and with all the advantages that come to modern civilization. Our people were working and producing the things that we needed upon which to live, and the things that contributed a little to the luxuries. And in the midst of it all, when we wore working like l>ees in the hive, when we were producing the wealth of the country, with the means of transportation of this wealth, and with the wonderful development of the transmission of information, that ought to have circumvented and prevented any reaction in industry and commerce, the financial flurry came. I do not know whether the gentleman who addressed this CURRENCY LEGISLATION. 79 committee this morning knows of a little of the inside history of that five-million loan that was expected to come into the Knickerbocker Trust Company in New York and the thing that interfered with the making good of that money. I do not know that I want to repeat it. I do not think I would want it to be spread on the record. That is the only reason. Mr. Crawford. Have the laboring people with whom you have been connected been injured very materially by the panic? Mr. GoMPERS. Yes, sir; and after I have finished the thought I want to express I shall be glad to answer that question. With this wonderful productive power, with the genius of the people of our country to produce and to produce abundantly, with the richness of our soil and the fertilit}^ of our lands — with all these things, over- night we are struck a blow, and the blow is my answer to the gentle- man; and that is, that a large number of establishments have closed down or reduced their force, and men willing to work, able to work, through no fault of their own, and I might say as a matter of fact through no fault of the employer, perhaps, are thrown upon the streets in idleness, with all the misery that that entails. Yes, we have suffered. I receive reports at my office, the office of the Ameri- can Federation of Labor, from all parts of the country and from other countries. I have selected about eight or nine organizations of labor, from which source a chart is drawn giving the exact number of the unemployed. The reason I say I have selected eight or nine is because the organizations that I have selected have established the best method to obtain absolutely accurate data as to state of employ- ment, and these charts I publish, as the editor of the American Fed- erationist, in that, our official journal. I publish that monthly, with a comparative chart of the same month of the previous year. This plan has been conducted for about ten years. The information upon that chart, showing the state of unemployment, is absolutely accu- rate. The organizations have established, for instance, a system of the payment of a certain benefit by reason of unemplovment, the remission of dues to the unemployed members, and these reports must be made from the various local unions to the national head, and these are in turn reported to me upon the payment of the benefits to the unemployed. Mr. Crawford. About what per cent have lost employment? Mr. GoMPERS. I can not tell you offhand. I could tell you by con- sulting the figures. The figures are not of my own origination. They are reported to me. and I have them figured out so as to produce the chart and the proper percentage. Mr. Waldo. Have you any approximate idea as to how many thousands there are out of employment now ? Mr. GoMPERS. No, I could not tell you ; but it is tremendous. There is one thing I wanted to say. I suppose this is a very peculiar state- ment to make before the Committee on Banking and Currency; but I think that the attitude taken by the organized workingmen of the United States, and followed by the workingmen of the country gen- erally — because even the unorganized concede the hegemony of the labor movement to orga^iizations of labor^ias helped this country to a greater and more marked degree than is recognized at this time. During previous eras of financial panic men were laid off. One of the first things that an employer would resort to was a reduction in 80 CURRENCY LEGISLATION. ■wages. The workingmen were poorly organized, if organized at all, and had no power of resistance, and the}' Avere easy marks. They had to yield. Their A^ielding sim-ply reduced their consuming power, the power of consurnption of things produced, and to that same extent threw out of employment more men. Wages were constantly reduced, and it was nibbling, nibbling at wages, with one employer competing with the other employer and nibbling the wages until they were forced down to a lower standard of living and until the reaction would come. We have said that that is not the way out ; that to re- duce wages is false economy. It is simply prolonging and accentu- ating the period of depression. By maintaining the wages of the employed it prevents the further accentuation of the panic or indus- trial crisis produced by continually reducing the power of consump- tion of the great mass of the jDeople of the things jDroduced. I just want to leave that thought, even though it may not be geiTnane to the solution of your problem. (After an informal discussion among the members of the commit- tee, the committee adjourned, subject to the call of the chairman.) [Washington Post, Sunday, November 3, 1907.] LABOR IS ASKED TO AID — MK. GOMPERS SUGGESTS PURCHASE OF GOVERNMENT BONDS TO RELIEVE STKINGENCY. Samuel Gompers, president of the American Federation of Labor, issued the following statement yesterday relative to tlie financial situation : " Of course we all realize that there is stringency of the circulating medium — money. That is, there is an insufficient amount of currency to carry on the enormously increased production of the past year and the means for its gen- eral distribution. This condition has been manipulated by the so-called financiers. The whole entire ' financial flurry ' of the past two weeks is noth- ing more or less than a gamblers' panic. " In my judgment, labor and civic organizations which have money in safety- deposit vaults would do a world of good to defeat the gamblers' scheme by help- ing to relieve the bona fide business world if this money were withdrawn and invested in United States Government bonds. "At the same time, it is urged upon all employers of labor not to attempt false measures of supposed relief of the present situation by wage reduction. In similar financial situations in the past such a policy has simply resulted in making conditions worse and more acute, and prolonging them. There is neither necessity nor wisdom in reducing wages as a way out of the situa- tion. Moreover, labor will not tolerate it." Committee on Banking and Currency, PIousE OF Representatives, Washington^ D. G.^ Friday^ January 31, 1908. The committee met at 10:30 o'clock a. m. Present, Representatives Prince (acting chairman). Powers, Mc- Morran, Weems, McCreary, Hayes, Weeks, McKinney, Pujo, Glass, Gillespie, James, Crawford, and McHenry. Present also, W. V. Cox, esq., John L. Hamilton, esq., Hon. E. J. Hill, Representative from Connecticut, and others. STATEMENT OF W. V. COX, PRESIDENT OF THE SECOND NATIONAL BANK OF WASHINGTON, D. C. The Acting Chairman. Mr. W. V. Cox is present and would like to present some resolutions to the committee. Mr. Cox. Mr. Chairman and gentlemen, at a meeting of the The Acting Chair3Ian. Excuse me, Mr. Cox. Let me ask you Avhere your home is? Mr. Cox. My home is in Washington. D. C. I am president of the Second National Bank of Washington and a member of the currency commission of the American Bankers' Association. The Acting Chairman. Have you been instructed by that associ- ation to present some resolutions? Mr. Cox. I have not been instructed, but Mr. Hamilton is also here representing that association, and we Avill present to you the resolu- tions that were adopted at Chicago. The Acting Chairman. When were they adopted? Mr. Cox. About two weeks ago. Mr. Hamilton. At a recent meeting. Mr. Cox. At the last meeting. Mr. Gillespie. That was the meeting of the currency commission of the bankers' association? Mr. Cox. Yes. The Acting Chairman. I have asked these preliminary questions, Mr. Cox, so that the record will show in behalf of whom you appear and for what purpose. Mr. Cox. The resolutions are in pamphlet form. I do not know that you desire those read, but it might be well to cover this and then let the remarks follow to show the nature of these resolutions. In short, the position taken by the currency commission w^as this : They did not favor the Aldrich bill, for reasons set forth herein; nor did they favor the Fowler bill, for reasons set forth herein ; but they did favor the bill that was favorably reported on by this committee a year ago, when hearing after hearing had been held, that bill to bo amended in one or two particulars — first, making it lawful money instead of gold j and second, I think, making it a prior lien. 37381—08 6* 81 82 CURRENCY LEGISLATION. Mr. McKiNNEY. Giving the notes a prior lien on the assets of the bank? Mr. Cox. Yes, sir; that is covered now by the McKinney bill, which was introduced three or four days ago. I would ask that this report be made a part of the minutes, and I will go over it if you desire. Mr. "Weeks. Perhaps I ought not to ask this question, if it is not proj)er to answer it. I would like to know if the commission was sub- stantially unanimous in its report. Mr. Cox. I understand it was. Mr. Hamilton. They were unanimous. Mr. Cox. I was not present. I was sick at the time; but the posi- tion that the commission took was exactly what I thought it should take; and I had a letter from Mr. Hepburn, who was the chairman, asking me to go to Chicago to appear for him in the matter. I have also heard from Mr. Talbert. Mr. Forgan, and Mr. Wardrop — all members of the commission. Mr. McKinney. You have a number of these reports? • Mr. Cox. I have a few of these copies. Mr. McKinney. Have you enough of them so that you could give a copy to each member of the committee? Mr. Cox. I will see that all the gentlemen get copies of these. I only had a few, and I brought all I had — a half dozen. I think I gave you a copy. Mr. McKinney. You gave me a copy; yes, sir. The Acting CriAiR:srAx. The stenographer will include in the re- port of the proceedings, in connection Avith Mr. Cox's remarks, this report of the currency commission of the American. Bankers' Asso- ciation, made at the meeting held at Chicago Saturday, January 18, 1908, if there is no objection on the part of any member of the com- mittee. The report of the currency commission above referred to is as fol- lows : Eepobt of Currency Commission of American Bankers' Association, made AT A Meeting held at Chicago Saturday, January 18, 1908. At a meeting of the currency coniniission of the American Banl^ers' Associa- tion, held in Chicago January 18, 1908, there were laid before it the Aldrich bill and the Fowler bill. These bills were road section by section and dis- cussed, and their provisions carefully considered. After thorough discussion the commission reported as follows : aldrich bill. This bill proposes tho issuing of additional bank notes based upon the se- curity of other than TTnitod States bonds, namely, obligations of State, city, or county, and first-mortgage railway bonds. It is believed that this scheme is Impraclicable, unwise, and financially unsound. L It is a depar1in-e from a safe system of note issues, which has been en- Joyed since the foundation of the national banking system ; it is a step back- ward to the condilions which give rise to the issuing of "wild-cat" currency before the civil war, which currency was based upon bonds of a similar de- 8crlF>tir>n. It may bo the entering wedge to the acceptance of undesirable bonds as socurily for note issues. There are recent examples in the laws of New York State logalizing such bonds for savings banks. II. The 1)111 would not aid llio business i)ublic in obtaining loans from banks In time of stress. In its i)ractical operation it would crii)ple the lending power of the banks. Inasmuch as it is not good banking policy to hold any consider- able amounts of such securities in the assets of commercial banks, the banks wishing to take out a new circulation would be obliged to purchase the new CURRENCY LEGISLATION. 88 securities or to borrow tlieiii. The direct means of obtaiuing securities not generally held in the assets of the banks would be found only by taking from their cash reserves $100,000 in lawful money, in order to issue' notes of $75,000. By this process the bank would decrease its lawful reserves, which form the basis of loans. If the bonds behind these notes wore borrowed instead of pur- chased, it would have the effect of increasing the liabilities of the banks, which is wrong in princiiile and pernicious in practice. One hundred thousand dollars in lawful reserves would support loans of $400,000, while under the Aldrich bill $100,000 taken from the reserves and invested in bonds, would only permit the lending of $75,000. Thus, in its practical operation, it would seriously impair the ability of banks to meet the demands of the borrowing i)nblic. III. This bill would tend to induce counties and municipalities to enlarge their obligations because a fictitious bond market would be created. It would set a premium upon the increase of local indebtedness, which would be highly detrimental. It should be no jtart of Government legislation to aid in market- ing securities. IV. The necessity of ascertaining definite infornuition as to population of cities, debt limits, valuation of taxable property, defaults, dividends on rail- way capital, and all other technical requirements would entail such delays as to make the notes available only after the emergency had passed. A crisis is short, sharp, and decisive, and the Aldrich bill is a remedy offered to a man after recovery or death. V. The provision of the Aldrich bill to tax such additional notes 6 per cent will make their cost prohibitive. Calculated on a basis of $100,000 of bonds purchased at par, bearing 4 per cent per annum, and estimating the lending rate of money to be 6 per cent, the net loss to banks taking out such circula- tion would be $2,000 per annum, or at the rate of 2 per cent. Illustration. COST OF TAKING OUT NOTE.S AGAIN.ST PURCHASED BONDS. $100,000 loanable at 6 per cent $G, 000 Tax at 6 per cent on $75,000 4,500 Total cost 10, 500 INCOME. 4 per cent interest on $100,000 of bonds $4, OiX> Loan, $75,000, at 6 per cent 4,500 ' Total income S, .500 Net loss 2, 000 This calculation does not include loss of interest on redemption fund nor the cost of printing and redemption of notes. When the price of such bonds becomes inflated by reason of their use as a basis of circulation, as in the case of United States bonds, the cost of the notes would be proportionately increased. If the bonds were borrowed instead of purchased, the cost of notes issued would be the same. Illustration. COST OF TAKING OUT NOTES AGAINST BORROWED BONDS. Tax on $75,000 notes at 6 per cent $4,500 Interest paid for use of $100,000 bonds at 2 per cent 2,000 Total cost 0, 500 INCOME. G per cent interest on .$75,000 4,500 Net loss 2, 000 84 CUERENCY LEGISLATION. Calculation is exclusive of loss of intei'est on redemption fund and the cost of printing and redemption of notes. It is tlins proven that should banks be forced to take out these notes, the minimum rate to the borrower would be the actual cost of 8 per cent, inde- pendent of any charge for the use of the capital, the expenses of doing business, and the risk of lending. If fair allowance be made for all legitimate charges, the net cost to borrowers would be as high as the prohibitive 10 per cent tax now imposed by the Government on State-bank issues. VI. The high cost of taking out these notes must obviously be paid by the needy borrower, and in that event the bill must be regarded as a measure operating to tax the customer in a time when he especially requires assistance. Under normal conditions a seasonal demand, arising in the autumn, causes higher rates of interest, while under the operation of the Aldrich bill the charge for currency needed in those periods would be still further increased to the bor- rower. The enforced rise of interest rates would not only apply to loans effected by the use of such notes, but would at the same time increase the rates on the entire line of discounts carried by a bank, thus imposing a heavy and- unnecessary burden upon the agricultural and business interests of the whole community. For these reasons, the commission finds itself obliged to express its disapproval of the Aldrich bill. THE FOWLEE BILL. After deliberate consideration of all the provisions of House bill 12677, Sixtieth Congress, known as the new Fowler bill, we disapprove it. While it contains certain meritorious features, it introduces schemes so far-reaching in their scope and touching so many collateral interests not germane to the real solution of our currency difficulties that we believe its passage would unsettle rather than improve financial conditions. Let us not be unmindful of the fact that in response to the demands of the people unsound and radical legislation has had its precedents in our monetary history. After the panic of 1873 the demand for some action with reference to currency was so strong that Congress passed a bill increasing greenbacks by $44,000,000, a project which was wisely vetoed by President Grant. After the panic of 1893 Congress gave its approval to a measure providing for the coin- age of $55,000,000 of silver, which was vetoed by President Cleveland, who followed the excellent precedent established by President Grant. In these two instances we have had examples of hasty measures following financial panics, and in the two bills herein discussed we have what appears to us to be similar unwnse measures following the i-ecent crisis. PLAN OF AMERICAN BANKERS' ASSOCIATION. The principles euunciated by the commission and approved by the American Bankers' Associaticm in convention assembled at Atlantic City on September 23, V.H>~, have been at this time carefully reviewed, and we are still firm in the belief that they are economically sound. We have accordingly prepared a plan embodying these i)rinciples. The difference between the original plan of the commission (embodied in House bill 23017, SDth Cong.) and the p^'esent plan is to be found in the provision that the holder of a credit note, instead of being a general creditor, shall have a i)rior lien on the assets of the issuing bank. The notes thus issued would be automatically adjusted in volume to the demands for currency. The security to the notes thus provided by i)ledging the whole of the assets of a bank would afford more desirable protection to ji note lioFder than a portion of those assets in a segregated form, and such notes can be issued under provisions wliicli will insure alisolute safety to the note holder, an ami)le supply of currency to the public, relief from the disturbed conunei'cinl conditions such as those through which we have recently i»:issed, and, linaliy, the certahi retire- ment of tiie notes when they have fullilled their purpose in the hands of the puhlif. I'lie i»lan jn-ojiosed by the commission is as follows: " Jic it enacted by the Senate and House of Representatives of the United States of America in Conr/ress assembled, That from and after the passage of this act any national bunking association which has been in business for one year and has ;i surplus fund equal to twenty per centum of its capital may take out for i.ssue and circulation national bank notes without a deposit of United Slates bonds as now provided by law. Said notes shall be known as CURRENCY LEGISLATION. 85 'national bank guaranteed credit notes.' Said notes shall be issued in such form and denominations and under such rules and regulations as the Comp- troller of the Currency shall fix. The amount of said notes so taken out by any national banking association may be equal to forty per centum of the amount of its national-bank notes at any time outstanding, which are secured by the deposit of Government bonds, but shall not exceed in amount twenty- five per centum of its capital : Provided, Jioivevcr, That if at any time in the future the present projwi-tion of the total outstanding unmatured United States bonds to the total cai)italization of all national banking associations in active operation shall diminish, then the authorized issue of national bank guaranteed credit notes shall be increased to a correspondingly greater percentage of the bond-secured notes. " Sec. 2. That every national banking association taking out national bank guaranteed credit notes in accordance with the foregoing section shall pay to the Treasurer of the United States in the months of January and July a tax of one and one-fourth per centum upon the average amount of such notes in circulation during the preceding half year. " Sec. 3. That any national banking association which has taken out national bank guaranteed credit notes in accordance with the provisions of section one of this act may take out a further amount of national bank guaranteed credit notes equal to twelve and one-half per centum of its capital, but It shall pay to the Treasurer of the United States in the mouths of January and July a tax of two and one-half per centum upon the average amount of such notes in circulation during the preceding half year. " Sec. 4. That the total amount of bank notes issued by any national banking association, including national bank guaranteed credit notes taken out in accordance with the provisions of this act, shall not exceed the amount of its paid-up capital. " Sec. 5. That any national banking association situated and doing business in a central reserve city or a reserve city shall at all times have on hand in lawful money of the United States an amount equal to at least twenty-five per centum of its national bank guaranteed credit notes in circulation, and every other national banking association shall at all times have on hand in lawful money of the United States an amount equal to at least fifteen per centum of its guaranteed credit notes in circulation: Provided, however. That any national banking association situated and doing business in a reserve city may keep one-half of its lawful money reserve on deposit in a national bank in a central reserve city or in a reserve city and that every national banking association situated and doing business outside of a central reserve city or a reserve city may keep three-fifths of its lawful money reserve on deposit in a national bank in a central reserve city or in a reserve city. " Sec. 6. That the taxes upon national bank guaranteed credit notes provided for in sections two and three of this act shall be paid in lawful money to the Treasurer of the United States. Said taxes, when received, shall constitute a guaranty fund to redeem the notes of failed banks and to pay the cost of print- ing and current redemption. " Sec. 7. That when any national banking association takes out any national bank guaranteed credit notes for issue and circulation, it shall deposit with the Treasurer of the United States in lawful money an amount equal to five per centum thereof. The amount so deposited shall be placed in the guaranty fund for the purposes thereof. But said amount shall be refunded to the respective banks as soon as the taxes piovided for in sections two and three of this act maintain said guaranty fund above five per centum of the maximum amount of national bank guaranteed credit notes taken out for issue and circulation, but that no bank shall withdraw any part of its de])osit of said five per centum until it shall have to its credit in said fund more than five jier centum. " Sec. 8. That the Comptroller of the Currency shall designate certain cities conveniently located in the various sections of the United States for the cur- rent daily redemption of said national bank guaranteed credit notes; he shall fix rules and regulations for such redemption ; and, before authorizing and per- mitting any national banking association to take out for issue and circulation any national bank guaranteed credit notes, ho shall require such bank to make arrangements satisfactory to him for the current daily redemption of such notes in every x-edemption city so designated. ■" " Sec. 9. That said national bank guaranteed credit notes, issued in accord- ance with the provisions of this act. shall be received at par in all |)arts of the United States in payment of taxes, excises, public lands, and all other dues to 86 CURRENCY LEGISLATION. the United States, except duties on imports ; and also for all salaries and other debts and demands owing by the United States to individuals, corporations, and associations within the United States except interest on public debt and in re- demption of the national currency. Said notes shall be received upon deposit and for all purposes of debt and liability by every national banking association at par and without charge of whatsoever Ivind. " Sec. 10. That the holder of any national baulv guaranteed credit note shall have a prior lien on the assets of the national banliing association issuing it and on the statutory liability of shareholders. " Sec. 11. That upon the failure of a national banking association all out- standing national bank guaranteed credit notes taken out by it in accordance with the provisions of this act shall, upon presentation to the United States Treasurer, be paid in lawful money out of the guaranty fund ; but the United States Treasurer shall recover in lawful money from the assets of the failed bank the amount of the guaranteed credit notes of such bank outstanding at the time of failure, and the same shall be paid into the guaranty fund as pro- vided in section ten of this act. " Sec. 12. That any national banking association desiring to retire its national bank guaranteed credit notes or to go into liquidation shall pay into the guar- anty fund an amount of lawful money equal to the amount of its national bank guaranteed credit notes then outstanding. " Sec 13. That any national banking association desiring to take out national bank guaranteed credit notes and having notes outstanding in excess of sixty- two and one-half per centum of its paid-up capital, to secure the payment of which United States bonds have been deposited, may, upon the deposit of law- ful money, redeem such excess without reference to the limitation of nine million dollars each month prescribed in the act approved March fourth, nineteen hundred and seven." Respectfully, The Currency Commission of the American Bankers' Association. Mr. Cox. Mr. Chairman, I would ask that you hear Mr. Hamil- ton, one of the pioneers in credit currency, who has been before you on other occasions, and who was formerly the president of the American Bankers' Association. STATEMENT OF JOHN L. HAMILTON, ESQ., OF HOOPESTON, ILL. The Acting Chairman. Please state where your home is, Mr. Hamilton. Mr. Ha:milton. Hoopeston, 111. The Acting Chairman. What position did you hold in connection with the American Bankers' Association? Mr. HA:\riLTON. You mean at the present time? Tlie Acting Chairman. No; what position did j^ou hold? Mr. Hamilton. I was president of the association two years ago. The Acting Chairman. For what years? Mr. Hamilton. For the years 1905-6. The Acting Chairman. Are yon now a meml)er of that associa- tion? Mr. Haaiilton. Yes, sir; T am a member of the association, and a member of the currency commission, and executive committee. The AcTiNc CiiAimiAN. And as a member of the currency com- mission that rej)()rted favorably upon a bill at a meeting held at Chicago. 111., January 18, 1908, you are now appearing before us? M r. H A M I LTON . Yes, sir. The Acting Chairman. Proceed in your own way, Mr, Hamilton. Mr. Hamilton. The commis.sion met in Chicago pursuant to the call of the chairman and took up the two principal measures that CUEKENCy LEGISLATION. 87 were before Cono;ress, as we imdeistood at that time. There were several others before Conf^ress, but the two that were attracting the greatest attention were tlie Aldricli 1)111 and the bill proposed by your chairman, Cono-ressman Kowler. After discussion of these measures for the greater part of the day a committee was appointed which prepared the resolutions that you have before you. The Acting Chairman. One question, please. Were there many bankers present at that meeting? Mr. Hamilton. Nine of the 15 members of this committee were present at the meeting. The Acting Chairman. Can you, from memory, name those men, or have yon any data from which you can name them, and tell from what sections of the country they came? Mr. Hamilton. Yes, sir; I think I can name every one of them. Mr. James B. Forgan, president of the First National Bank of Chicago, was chairman of the meeting, in the absence of Mr. Hep- burn, who had gone to P^urope; but Mr. Hepburn gave out a letter outlining his objections to these measures, which was practically the same as the report ; Joseph T. Talbert, vice-president of the Com- mercial National Bank of Chicago; Mr. Charles H. Huttig, presi- dent of the Third National Bank, at St. Louis; Mr. Luther Drake, president of the Merchants' National Bank of Omaha ; Mr. Myron T. Herrick. chairman of the board of directors of the Society for Sav- ings of Cleveland, and ex-governor there; Mr. Robert Wardrop, president of the People's National Bank of Pittsburg; Mr. Arthur Keynolds, president of the Des Moines National Bank of Des Moines, Iowa; Mr. Sol Wexler, vice-president of the Whitney Na- tional Bank of New Orleans, and myself. Mr. Hayes. And Mr. Perrin? Mr. Hamilton. Mr. Perrin was not present. He was sick. The Acting Chairman. I only wanted to show on the record the character of the men who were present and the sections of the country represented. Mr. Hamilton. I will say in this connection that Mr. Perrin and Mr. Wade, who were both members of the committee, were not pres- ent, yet they have since indorsed the action of the committee, as have also Mr. Cox, Mr. McCord, and Mr. Swinney. They are the five who were not present. There were six who were not present, counting the chairman, Mr. Hepburn. We had in addition, at that meeting, Mr. Lacey, president of the Bankers' National Bank of Chicago; George M. Reynolds, president of the Continental National Bank, and Mr. George E. Roberts, president of the Commercial National Bank. They were present and took part in the discussion on this measure, and while they are not recorded in connection with this, yet they were of the same opinion as the committee. Mr. Gillespie. How long were j'^ou in session? Mr. Hamilton. We were in session all day Saturday, from about 9 o'clock in the morning until about 6 or 7 o'clock at night. The committee feel that this is the best measure that has been so far before the American people. This measure has been presented, as you perhaps know, to a great many State bankers' associations and a great many different organizations, as well as to the member- ship of the American Bankers' xVssociation. It has the approval of the executive council of the Bankers' Association of Illinois and 88 CURRENCY LEGISLATION. of the American Bankers' Association. This bill was brought before the convention held at Atlantic City and indorsed at that meeting. Mr. Gillespie. Last summer? INIr. Hamilton. Last suinnuer. The secretary sent out notices to all the members of the association that one day would be set apart for the discussion of this measure, giving all those who had any objections to present an opportunity to be there and present their objections. The notice was not only sent to members of the asso- ciation but to bankers who were not members, so that anyone might have an opportunity to be there. It is true that the measure was gotten up between the meetings of the association, and we deemed it advisable as a commission to present it to that organization and secure its approval. There were but two men who appeared upon the floor of the convention in opposition to the measure. They were given full liberty to talk as long as they chose and as much as they chose on the subject. After listening to these gentlemen and the arguments in favor of the measure, which were mainly presented b}^ the chairman. ]Mr. Fowler, but one other member of the commission, Mr. Perrin, taking part in it, they were adopted. You may have noticed a criticism in the newspapers, claiming that there were a limited number present at the meeting. There were about 150 bankers present in the room when the vote was taken, and 12 of those voted against the adoption of this measure. How- ever, the notice had been sent out and all bankers had been given an opportunity to be there and to vote against it if they were inter- ested in it. ISIr. Gillespie. What is the membership of the association that attended the meeting at Atlantic City? What 'was the largest attendance on any one day? Mr. Hamilton. The attendance that morning was perhaps the largest we have had. I should judge there must have been in the neighborhood of 2,000 present at the morning meeting, and this was taken up at that meeting. Mr. Gillespie, And 1.50 were present when this matter was acted on? Mr. Hamilton. Yes: they had drifted out. Mr. McCreary. But thev were on notice that this was to be taken up? Mr. Hamilton. That day was set apart for it. It was the special order, and nothing else was set for that day. There were some other matters considered — amendments to the constitution, etc. — but this was the only thing on the programme published by the association for that day for their consideration. Mr, Gillespie. You have seen the pamphlet that has been sent around by Mr. Frame? Mr. Hasiilton. Yes, sir. Mr. Gillespie. With liis speech, giving a recital of the proceedings of the convention? Mr. Hamilton. The speech published hj Mr. Frame and sent broadcast throughout the country was not delivered in the con- vention. Mr. McCreary. It was canned goods? It was a speech that he did not deliver, but had leave to print? CURRENCY LEGISL.\TION. 89 Mr. Hamilton, Yes. He did not deliver that speech. Mr. James. Do you think if he had delivered it that it would have affected the proceedings any? Mr. Hamilton. Not at all. I do not think so. Mr. Gillespie. Did he speak? Mr. Hamilton. He spoke in a general way, and apologized for taking up the time of the convention, although he had unlimited time at his disposal. Mr. Frame has made challenges to members of the commission in his printed speech that he did not make in the nieeting. The challenges would have been answered had he done so, but for some unknown reason the speech was permitted to be printed as though he had delivered it. The fact is that that speech has never been delivered in full at any meeting. Mr. Weeks. Is it printed at the expense of the association or at his own expense? JNIr. Hamilton. I think it is largely at his own expense, although it is a part of the proceedings of the American Bankers' Association in their published report. Mr. Gillespie. Is he a member of the association ? Mr. Hamilton. Oh, yes; he is a member. His bank is a member of the association. Mr. McCreary. Is he a member of the commission ? Mr. Hamilton. He is not a member of the commission. Now, going back to the bill, we haA'e been very much disappointed as a committee because the bill was not introduced earlier in Congress, supposing, of course, that it would be. This bill has back of it the support of three-fourths of the national banks outside of the re- serve cities, and it has the indorsement. I think, of the majority of the banks in the reserve cities. I know particularly as to the banks outside of the reserve cities for the reason that I took this matter up individually with those institutions. The more we consider the measure the better we think it is for the interest of the country. We believe it will give to the country a safe currency, one that will be automatic, one that will meet with the demands of the times and be the means of preventing, to a large extent, panics. We realize that no measure will absolutely do this, no matter how it is framed, and no matter who gets it up. This bill provides — do you want me to go into the general pro- visions of the bill, all the way through? The Acting Chairman. Yes. Mr. Pujo. That is the McKinney bill? Mr. Hamilton. Yes. Mr. Pujo. Yes, I would like to have you do so. Mr. James. You need not. of course, refer to the technical details. The Acting Chairman. State it in your own way. Mr. Hamilton. This bill, under section 1, provides that a national bank before it can issue such notes must have been in business a year and must have a surplus equal to 20 per cent of its capital. It also provides that it must have out a bond-secured circulation equivalent to G2^ per cent of its capital, and after that it may issue credit notes equal to 40 per cent of the bond-secured circulation outstanding. It may then issue Mr. McKinney. Explain why you took that G2-1 per cent as the basis. 90 CURRENCY LEGISLATION. ]Mr. HAMiLT0'3^The 62^ per cent basis, as was explained last year in connection with this measure, was arrived at as being the avail- able bonds held by national banks that might be used for bond- secured circulation; and it was done not only to protect the national banks who are holders of these securities but to protect the individual holders. The Government having established the precedent, in the original enactment of our national-bank act to provide a market for its securities, and the jjeople having faith in this class of securities as to the note issue, we did not think it was advisable to depart en- tirely from that precedent. It also assures a future market for Government securities. (At this point an informal discussion took place as to where in the bill the provision as to 62^ per cent was to be found.) Mr. McKiNXEY. I will say that I introduced the identical text that was sent to me. If that provision is not clear enough to express the meaning of the commission, that can very easily be changed. As 1 understand, the desire of the commission is to preserve the present character of the bond-secured notes, and to keep it up to that amount, and not to change from a bond-secured circulation entirely. Mr. Hamilton. Yes. The Acting Chairman. Proceed, Mr. Hamilton. Mr. Hamilton. The bill provides further that after the banks have out 62^ per cent of their capital in bond-secured notes they may then issue 25 per cent of their capital in notes taxed at 2^ per cent, and they may issue an additional 12J per cent in credit notes bearing a tax of 5 per cent. Mr. James. This first issue bears a tax of 2^ per cent? Mr. Hamilton. The first issue bears a tax of 2^ per cent. Section 2 of the bill provides for the 2^ per cent tax. Your committee amended that last year and made it 3 per cent. We went back to the original idea and made it 2^, believing in the theory that a low tax was better than a high tax. Mr. James. As I understand it, under this bill you require them to deposit a 5 per cent reserve to redeem these notes issued originally, in gold. Mr. Hamilton. Yes, sir ; in the guarant}^ fund. Mr. James. You make the first tax 2| per cent, and you keep that tax in the fund until it becomes 5 per cent, and then you let the banks withdraw the 5 per cent in gold? Mr. Hamilton. Yes. Mr. James. But what becomes of the tax which has accumulated over the 5 per cent, which has enabled the banks to withdraw the original 5 per cent, when a bank desires to liquidate or to quit business t Mr. Hamilton. That, I presume, would remain in the hands of the United States Treasury. Mr. James. But it is in the hands of the Treasury now as a trust fund. Is there any provision in the bill that it shall be covered into the Treasury? Mr. Hamilton. No; there is no provision of that kind. Mr. Ja:\ies. Do you think it ought to go into the Treasury? Mr. Hamilton. I really think tliere should be a limit to the amount of the guaranty fund established in some manner; but in the measure CURRENCY LEGISKA.TION. 91 there is no limit. It is left an open question. You have now your annual tax from year to year, and that accumulates Mr. James. It accumulates after the 5 per cent Mr. McKiNNEY. The tax keeps on. Mr. James. When it gets over the 5 per cent, what becomes of it? Mr. Hamilton. There is no j^rovision for that. Mr. McKiNNEY. It keeps piling up. It does not go back to the banks, and it is not limited to the 5 ])er cent. Mr. Hamilton. We have not undertaken to dispose of that surplus. Mr. Weeks. As long as you are speaking of the tax on this cur- rency, I Avould like to ask two or three questions about it, in a general way." Mr. Hamilton. Yes, sir. Mr. Weeks. Do you not think we have currency enough in ordi- nary times, say forty-five Aveeks out of the ,year, under present conditions ? Mr. Hamilton. Yes, I do. Mr. Weeks. Well, do you think under this method of taxing the currency that it would all of it ever be retired ? Would not some of it be in circulation all the time? Mr. Hamilton. I think there is bound to be some of it in circula- tion, and I think it good policy that it should be in circulation. Mr. Weeks. Then it is adding to the volume of our present circula- tion all the time, to a certain extent. Mr. Hamilton. I do not think that the amount would be material. Mr. Weeks. Why would it not be material ? Mr. Hamilton. It depends on your redemption facilities. Mr. Weeks. Why would it not be material, if the banks can make a profit out of it? Mr. Hamilton. The ability of the banks to make a profit depends upon the length of time the notes will remain in circulation, of course. Mr. Weeks. Of course. Mr. Hamilton. And we do not believe that these notes can remain in circulation for a longer period than thirty days under the most favorable circumstances. Consequently the profits would be so mea- ger that the notes would naturally be retired. Mr. Weeks. The same notes will not remain longer than thijty days, but some other notes will go right out to take their places, will they not? Mr. Hamilton. They may, and they may not; because when the tide of currency is toward the commercial centers, it is practically impossible to keep out any considerable quantity of these notes. There are certain seasons of the year when the money accumulates in the commercial centers — the actual bills. Mr. Weeks. Let us take an instance. You issue notes, and they come into Mr. Cox's bank. There is a profit in issuing the notes, and Mr. Cox sends yours in for redemption and issues his own, does he not ? Mr. Hamilton. Certainly. Mr. Weeks. Is not that going to be perpetual, that method of keeping the notes out as long as there is any profit in doing it? So that although a note may be and will be on an average retired in thirty days, does it not mean that the same volume of notes is going 10 be out all the time, provided there is a profit in issuing them? 92 CURRENCY 1,EGTSLATI0N. Mr. Ha:hiltox. Ko, it does not mean that, for the reason that it would be impossible for Mr. Cox, residing in a commercial center, to keep out any considerable quantity of those notes. They would be immediately sent back for redemption; and if he should put out $50,000 in notes, to-morrow, or to-day, in the city of Washnigton, he is practically sure to find those in the clearing house to-morrow morn- ing for redemption, the same as he finds the drafts issued on the in- stitution or his cashier's checks there for redemption. Mr. Ja^ies. Suppose it was in a country like I represent, where we have no clearing house ; where we have a national bank in, say, one town and two in another, and money is worth 6 or 8 per cent. Would it not be profitable for the banks to issue these notes at 2^ per cent if they can lend the money at 6 per cent and keep it out? AVhen people in my country get money, they do not rush to put it in bank. They keep' it in their pockets "to a certain extent. When the banks would lend the money at 6 and even at 8 per cent in Kentucky, in my district, would not that money stay out ? Mr. Hamilton. I do nol think that money will stay out to any con- siderable extent in any locality. The whole principle, I think, that the banking system of the United States is based on is the checking system rather "than on the note-issuing system. " Mr. James. That is true in the great cities. Mr. Hamilton. We are encouraging the people from the country — you and I are both from the country Mr. James. But that is not true in the country. Mr. Hamilton. But we are encouraging the people to build up the deposits. That is what they are aiming for. Mr, James. All the time; yes. Mr. Hainiilton. Your banks, no matter what kind they may be, national. State, private, or what not, are encouraging the people to dei)osit their money in the banks and to use their individual checks in preference to currency. Mr. James. But right there let me say that this panic has donte more to discourage that than anything on earth, and you Avill find that it will take years to get the people back to the standard of con- fidence that they had before the panic in depositing their money. Mr. Hamilton. There is no question about that. You are abso- lu'tely right in the propositio ) that this panic has been one of the most diastrous to the banking interests that ever occurred, and it has shaken the confidence of the public in those institutions. Xow, if this measure had V)een enacted a year a.oo it Avould have prevented the occurrence of this panic. The condition in your sec- tion of the country was the same as the condition with me. I am the only member of our commission who does not reside in a clearing- house center. The result of this panic and the trouble it brought upon us was tliat we could not get actual ciuTency from the commer- cial centers. In some localities the demand for currency was abused by tlic country bank-ers. Mr. Wkkks. Do ytu not think it was generally abused? Mi-. HAAFir/roN. I do not tliink it was generally abused. Mr. Weeks. Does not the statement of the national banks prove that? Mr. Haves. T think it does. CURRENCY LEGISLATION". 93 Mr. James. Was it not abused, not so much by the country bank- ers as by the fellow who had the country bankers' money on deposit? Mr. Hamilton. There are two sides to that (juestion. We who live in the country are inclined to coudenni our city brother. Of course the city banker had his difficulties to contend with, and I think w4ien you sift both sides of the question down they were both indiscreet in their actions in that respect ; but, nevertheless, our people were unduly alarmed by the fear that they could not get money from the reserve institutions; and in every conmnmity where the barks had to pay a limited amount of cash to their customers those communities have been seriously crippled by the conditions that have prevailed, and confidence has been disturbed in those communities. Now, going back to the idea of the country ba ik note remaining out longer than the note of the commercial center. It might perhaps remain out a little longer, but if these notes are sent in by any institution (as is contemplated by the Commission, but not embodied in the report) through the Post-Office Department, for credit without expense to the bank remitting, it will immediately send those notes home for retirement ; and I think that it might be a wise provision to have that expense borne by the bank of issue. This would be an extra induce- ment to the banks wdio are not in the national system, sending in these notes for redemption. Mr. James. The reason I asked that question was this: Take my home town. There the bank suspended specie payment and only paid 10 per cent on a man's deposit for over sixty days. It is a tobacco community. They commenced buying tobacco, and when they paid their money out to the farmers,the farmers would not put that money in bank. They were alarmed, and they took the money home with them. Now, if they were satisfied with this currency, would they not do that same thing? Mr. Hamilton. If they did take this kind of currency home, it would not hurt, for it would only stay a limited time before it would get back in the natural channels of business, the same as has occurred under the present conditions. Mr. Hayes. In other words, they would spend it? Mr. Hamilton. Yes. Mr. jA:\rES. But you must not presume on the theory that the farm- ers have to spend all they get. Mr. Hamilton. It is not an inflajtion as long as it is kept hidden. Mr. Gillespie. The point is that there is a profit to the bank as long as a man keeps it in his pocket. Mr. Weeks. What I wanted to ask you, further, was whether in your judgment it is desirable for banks to make any considerable profit on the issuing of circulation? Mr. Hamilton. I do not think it is desirable that they should make any considerable profit: no. sir. But I think there should be some profit in it. Mr. Weeks. I do not think that any man w^ith any reason would contend that there should not be a profit in any business enterprise: but circulation is so intimately associated with everything in our business life that it is necessary. The bank is supposed to make its profit out of its commercial business, or the business of loaning money, which is its business. Do you not think that the profit in issuing circulation should be reduced to the minimum? 94 CURRENCY LEGISLATION. Mr. James. Especially an emergency circulation. Mr. Weeks. I will confine it to that. Mr. Ha:\[ilton. Yes; I thmk it should be, and I think it is reduced to the minimum in this measure. Mr. Weeks. I think the present circulation is reduced to the mini- mum. I agree with you ; but do you think it is in this bill ? Mr. Hamilton. I think so; yes, sir. Now, take this bill, the origi- nal bill that was presented by your committee, with the 3 per cent tax, with money loaning at 7 per cent. I have had it figured by the actu- ary of the Comptroller's Office and by other men, and it shows a net profit to the bank, providing that such notes remain out on an average of thirty days, the same as they do in Canada, of 1.95 per cent. Mr. Weeks. Do you not think that is too much ? Mr. Hamilton. I do not think it is too much, because I do not think that they will be able to maintain the full amount in circula- tion for thirty days. Mr. Weeks. Suppose it remained out sixty days instead of thirty days. Wliat would be the profit? Do you know? Mr. Hamilton. I do not knoAv. Of course it would be greater. Mr. Weeks. What I wanted especially to get your opinion on was whether jon think it desirable to have more currency than Ave have now for normal times, and Avhether you think it is desirable that banks should make any considerable profit out of circulation. You know, of course, that there is a very Avidespread prejudice against anybody making any monej^ in this countrj- just noAV. Mr. Hamilton. Certainly. Mr. Weeks. Especially the banks. Mr. Hamilton. Yes. Mr. Weeks. And it seems to me that there is a point — my preju- dices are not against the banks, as you knoAv — Avhere Ave can properly draw the line in legislation. The business of the bank is to loan money, and to make its profits out of loaning money, and Avhen you make money out of a priAdlege Avhich comes from the Government, and which affects all the people Avhether they are borroAvers of money or not, it seems to me that should be reduced to a minimum; that that is good policy and good business from the standpoint of the Govern- ment. For that reason I think myself that the tax on the circulation is too small, and I Avanted your definite ideas on that subject, becaiL^ you have had large experience. Mr. Gillespie. The bank stand's to furnish accommodation to its customers. These credit notes do not represent the capital of the bank. They only put the bank in the same position to use these notes as otherAvisc they could use their deposit privileges. To tax the bank- er's note stands upon no other plane than to tax the right of the de- posit privileges. These notes can be used and put into circulation, but as long as they are in the teller's draAver, in the bank's possession, they represent nothing but a signed piece of paper. They become nothing until they go out in circulation. The bank stands to furnish this accommodation to commerce, just as it gives the right to draAv a check, and to require a bank to pay a tax Avhcn it puts out one of these credit notes is on no dill'ereut plane Avhatever from requiring the bank to pay a tax Avhenever it opens up a deposit account Avith a customer. CUKEENCY LEGISLATION". 95 Mr. Weeks. I should be perfect!}' willing to argue that jioint with my friend from Texas at the pro})er time. Mr. Gillespie. And every cent of lax that you put on the bank it is going to recover in self-defense. It is going to put it on commerce. No other country that issues this kind of credit ever put a tax upon it, except in Canada, where the}- put a Muall tax on to create a guar- anty fund. Mr. Weeks. I am getting at it from another viewpoint entirely. In my judgment we have ample currency for ordinary needs, and any further issue of currency means a tendency to inflation. I do not use that term technically either. I Avant to be sure that we are not going to have any further issue of currency as a permanent issue. I want it to be temporary, and for that reason I want the tax large enough to immediately and suddenly drive that currency in. That has nothing to do with the technical question which Mr. Gilespie has raised, and in wdiich I think he is probably right ; and if we did not have half a dozen other kinds of circulation I would agree with him absolutely. But having the other circulation, we must figure from that stand- point, and not from the standpoint that we w^ould figure from if we were starting to entirel}' revolutionize our currency s^'stem. That is what I am trying to get at. Mr. Crawford. You want an ordinary increase, do you not ? We started about ten years ago with $*22, and now" we have $32. Mr. Weeks. I understand, but w^e have circulation enough, in my judgment. Mr. Crawford. But what about the increase in business and popu- lation ? Mr. Weeks. The circulation has nothing whatever to do with the business in ordinary times. Mr. Crawford. Do you not think the increase of circulation since 1896 has had something to do with the business prosperity of the coinitry ? Mr. Hayes. You gentlemen are taking up Mr. Hamilton's time. I want to hear him, if you will excuse me. Mr. Powers. I want to ask a few questions in reference to this. I was one of the Republican Members who refused to report your bill last year, for the reason that I believed it was very largely an infla- tion measure, based substantially upon the views that were advanced by the gentleman from Massachusetts, Mr. AVeeks. I see no sufficient reason to believe that this would be a flexible currency, that it would come back after it had been put out. Knowing that the conditions are not the same here as they are in Canada, that w-e have more money in the various State banks than we have in these, I want to ask you, if these bills are equally good wdth any of them (and they must be or there is no use in putting them out), what reason would any State bank, trust company, or savings bank have for selecting them out and sending them for redemption instead of continuing to pay them over their counters, if they have no bills of their own to get out ? Mr. Hamilton. They would have no particular interest in return- ing these bills unless there were some provision made for their return, either through the plan outlined by the Comptroller's office or else embodied in the measure. 96 CURRENCY LEGISLATION. Mr. Powers. Would they not continue, as long as they were good, to use them and pay them out, and would they attempt to return one of these any quicker than they would a national-bank note secured by bond ? Mr. Hamilton. It is contemplated, you know, that that part of the detail shall be covered by the Comptroller of the Currency in the rules that he makes governing these redemption centers. Mr. Powers. I understand Mr. Hamilton. And there is a provision here that such expenses may be paid out of this fund, you know. Mr. Powers. But what inducement is there for a trust company having an amount of money consisting partly of bond-secured cur- rency and partly of this currency to select these bills and send them to a reserve center to be redeemed as long as one is equally as good as the other, and one goes as current as the other? Mr. Hamilton. It depends, of course, upon the location of the institution largely. Mr. Po AVERS. But one is just as good as the other. Mr. Hamilton. If it is in tlie country, the country institutions would send those bills to their correspondents for credit, because they can send them w^ithout the expense. Mr, Powers. Why should a trust company do it, or why should any bank do it, unless it wants to get its own bills out? Mr. Hamilton. The reason they should do it is that it is natural for people in any line of business to avail themselves of any profit they can make by saving the expense of express on currency shipped. It is also to the interest of all bankers to keep down the circulation as much as possible. Mr. Powers. Perhaps you may not recall it. but I asked substan- tially this same question of Secretary Shaw, as to what he believed with reference to the bills returning within a reasonable time, and he said he did not think over 10 per cent would — and I concurred Mnth him — until it got worn out. Now. let me ask you one more question. Can you not in some way recall those bills, so that instead of this being an inflation measure that would increase the volume of currency — I agree with Mr. Weeks that we do not want it increased in ordinary times — it can be issued as emergency currency, and then returned to the banks? I like your bill in many respects. Mr. Hamilton. Of course our measure might be amended, fixing the date to which the note should remain out, but I do not think it advisable to do so. Mr. Powers. How do you propose to have the bank redeem the notes? By depositing other notes? Mr. Hamilton. In lawful money or circulation notes. Mr. Pf)WERS. I suppose you would permit them to be redeemed by depositing lawful money? Mr. Hamilton. Yes. Mr. Powers. I care not how large the tax is, it will not affect the circuhition unless you impound the lawful money and keep it by itself, not to be pnid out until the bills come in. A tax will not reduce the ciiculation under the existing laws, will it? Mr. Hamilton. What you mean is, if the money is deposited with the Treasury Department and it again deposits it Avith some other institution? CURRENCY LEGISLATION. 97 Mr. Powers. No matter if the bank has been relieved of the interest, the excessive currency or inflation is still out. Mr. Hamilton. That is a feature that we have not attempted to regulate, because it applies to the management of the Treasury De- partment. We did not think it advisable to embody any feature of that kind in this measure. Mr. Powers. Now, you said that if this had been adopted last year it would have prevented the present panic. I rather think it would, but having once issued several hundred millions more this year, how would it have been next year? AVould we not have it worse than this year, if it should prove to be an inflation i-ather than an elastic cur- rency ? Mr. Hamilton. I do not think it can be an inflation. Mr. Powers. I can not see how it is possibly anything else. Mr. Hamilton. Because the banking experience of the Commission shows that the money accumulates during certain periods of the year. The national-bank notes to-day accumulate in reserve cities and they do not know what to do with them. Mr. Powers. I understand that. Mr. Hamilton. These notes are bound to go in just the same as the national-bank notes go in. Mr. Powers. I admit that a certain percentage will get in, but most institutions will not send these in in preference to getting the in- terest, and the amount of currencj^ that is sent in will not be very large as compared with the great volume of currency of the country. I can not see any reason why jou can assume that these notes, if they are equally valid, and if the people receive them equally readily as any other put in circulation under our peculiar banking sj'stem in this country, shall come back, except very slowly. How long does it take for national-bank notes to come back — two or three years, on an average, does it not? INIr. Hamilton. Seven hundred and thirty days, I believe, is claimed to be the period. Mr. Powers. I can not see how they can come back more rapidly, or but very little more rapidly, than the present currency. If that is so, then this becomes thereby not an elastic currency, but an infla- tion currency, which we do not want; and that has been my objection to your bill. The Acting Chairman. Would it not be well for us to hear Mr. Hamilton through, because our time is running. I do not think Mr. AYeeks's questions have been answered, have they? ]\Ir. Weeks. I think he has answered all he cares to. The Acting Chairman. Go on with the other sections of the bill then, Mr. Hamilton, Mr. Hamilton. Section 3 of this measure provides for the 5 per cent tax increase, which would not be issued until after the other 2^ per cent notes had been in circulation, as is natural. The total amount of the bank-note issue, as provided in this measure, shall not exceed the capital of the institution. There has been a great deal of criticism of this particular section of the bill in different sections of the country. Natonal banks having out their full quota have objected to that provision, claiming that this measure would not give them any relief, because they can not issue any additional circulation. How- ever, I think that is a very important provision in this measure, that 37381—08 7* 98 CURRENCY LEGISLATION. there should be a limit to the amount of notes that may be issued. And ATe have provided in the last section of the measure so that national banks having out the full quota of issue maj^ reduce it down to 62^ per cent of their capital without reference to the law that now exists limitino; the amount of redemption to $9,000,000 a month. Section 5 of the measure provides for the legal reserve to be carried as against these notes, requiring the same reserve that is now carried against deposits in the different kinds of banking institutions, as designated under our national banking act. In other words, it pro- vides the same requirement as to the reserve in the central reserve cities, that 25 per cent be carried in their vaults ; and the same pro- vision as to reserve cities, requiring that they must maintain a reserve of 25 per cent, one-half of which may be carried with a central reserve city ; and the same provision as to the country banks, which require a 15 per cent reserve, three-fifths of which may be carried with reserve cities or central reserve cities. Mr. Weeks. Do you not think it advisable to increase the amount of the reserve which country banks should carry in their own vaults? Mr. Hamilton. I do not. I think that would be a serious mistake. I believe that the average country bank carries a greater reserve most of the time than the law contemplates they should carry, and if you should increase the reserve that they should carry to two-thirds in- stead of two-fifths 3^ou would be tying up $110^000,000 of additional money in the hands of the countiy institutions that would be abso- lutely useless in ordinary times. Mr. James. In times of panic have they not got that tied up any- how, in reserve and central reserve cities ? Mr. Hamilton. They have it tied up in central reserve cities to a certain extent, yes; but after a few daj^s of the experience that we have just had, the greatest difficulty we all had to contend with was that we did not have enough credits in the reserve cities rather than not enough cash. Mr. Pujo. I would like to ask Mr. Hamilton a question. The au- thorized circulation that could be taken out by national banks in this country approximates $900,000,000, does it not? Mr. Hamilton. Yes, sir. Air. Pujo. And the actual circulation of bank notes approximates $600,000,000, does it not? Mr. Hamilton. Yes. Mr. Hayes. Nearly $700,000,000. Mr. Hamilton. The last report. December 23, 1907, was $601,000,- 000. Mr. Pujo. During the financial panic of 1907, with a duty of one- lialf of 1 per cent every six months on circulation, would not 5fJi^00,000,000 of additional circulation to the volume of currency dur- ing the last panic have prevented this financial panic? Mr. Hamilton. I think so. Mr. Pujo. Did not the clearing-house certificates issued during the last panic amount to only $150,000,000 approximately ? Mr. Hamilton. I have never seen the figures on that. ^ Mr. Pujo. I am referring to the report of the Comptroller of the Currency, at page 60, showing that clearing-house certificates were issued amounting to $154,000,000. Mr. Ha:\iilton. I have never seen that report. CUKRENCY LEGISLATION. 99 Mr. Pujo. Did the issuance of these clearing-house certificates have a tendency to prevent runs on banks, and to protect the financial interests of the country, generally ? Mr. Hamilton. I think the issuing of the clearing-house certifi- cates was an excellent movement to stop the panic, but I do not be- lieve the issuing of the clearing-house certificates, or the thought that clearing-house certificates are likely to be issued, would be the means of preventing a panic. Mr. Pujo. Could not the national banks in this country, by taking out the circulation authorized by law. have prevented the occurrence of this panic in 1907 ? Mr. Hamilton. Certainly, sir; there was plentv of margin in it, I think. Mr. Pujo. Could they not. after the appearance of the panic, have prevented it by an application for the issuance of the currency to which the banks were entitled under the law? ISIr. Hamilton. The greatest difficulty was that they could not get the bonds to put up to secure the bond-secured circulation. Mr. Pujo. Is it not further a fact that there is not sufficient profit in the circulation for them, according to their viewpoint, which has prevented them in the past from taking out the circulation to which the J' were entitled under the law ? Mr. Hamilton. Under your present national-bank system of de- positing Government bonds as securit}^ for circulation there is no inducement for a national bank to issue these notes for the sake of profit, the reason being that the higher the rate of interest that pre- vails in the community the less profit there is in national bank note circulation. In other words, at an 8 per cent basis they would be losing money. Mr. Pujo. Then, your view, upon a study of this question, is that the banks could not have prevented this panic because they did not have the bonds to obtain the additional circulation to which they are entitled under the law ? Mr. Hamilton. They do not carry them, and do not have them; yes. (After an informal discussion the committee, at 12 o'clock m.. took a recess until 2 o'clock p. m.) AFTER RECESS. STATEMENT OF JOHN L. HAMILTON. ESQ.— Continued. Mr. Hamilton. jNIr. Chairman, I think we were on section 5 when we took the recess, relative to the legal reserve to be carried against the credit notes to be issued. The Chairman. I think you had finished that. Mr. Hamilton. It is contemplated in connection with this that the same reserve may be used in the issue of a credit note in case of emergency that is now used to secure a deposit, as against the de- posits. In other words, when there were heavy withdrawals of deposits you would have a larger legal reserve on hand that might be used to secure these notes, and credit notes would be put out in lieu of the withdrawing deposits. 100 CURRENCY LEGISLATION. Section 6 of this bill provides for the creation of a guaranty fund to be held by the Treasury. Mr. Gillespie. You still provide, I see, in the other section, that they continue to keep their reserve on deposit with other banks in reserve and central reserve cities. Mr. Hamilton. We make no change whatever in the present law relative to deposits. Mr. Gillespie. I believe it is your opinion that no change should be made ? Mr. Hamilton. I do not think it advisable to make a change in that case. Mr. AYeeks. If you increase the amount of the reserve which the country banks should keep, do you think you would be justified in reducing the amount of the reserve which the central banks should be compelled to keep, in the same proportion, or in similar propor- tion ? Mr. Gillespie. Say, a flat 20 per cent all around. Mr. Hamilton. Well, frankly, I will say that I have never given that subject any thought, and I do not know how it would apply. As to the loclring up of the reserve money of the country, that is something that would have to be demonstrated by figuring it out. I could not tell, in an oifhand answer. * Mr. Weeks. What do 3'ou think the effect would be if you com- pelled the country banks to keep 10 per cent in their vaults, if the increase of 4 per cent, which it would be, amounted to one hundred millions, as 3'ou stated this morning? Mr. Hamilton. One hundred and ten millions. Mr. Weeks. Well, something of that sort ; and reducing the amount to be kept by the central reserve banks 5 per cent, which would amount to the same amount of money. What do you think the effect would be on the countiy, and on the banking interests? Have you thought of that? Mr. Hamilton. I have not given that subject any thought what- ever, because the question has never arisen in my mind before; but I think that it is not desirable to change the reserve of the country bank. I do not think the recent conditions show that it is necessary that there should be an increased reserve exacted of them, held by the institutions. Mr. McKiNNEY. Down in my locality the reserves were away down at that critical time. Mr. Gillespie. You mean of the country banks? Mr. McKinney. Of the country banks. There was no way, ap- parently, in which they could be strengthened. They could not get currency. Mr. McMoRRAN. Is not that the best reason in the world why the country banks should require a larger reserve instead of a smaller reserve ? Mr. McKiNNEY. I always thought that if a country bank did not have a proper reserve it was through carelessness of their own. A panic never jumps on you without a minute's notice. Mr. CiiLLESPiE. Of course they had plenty of signs of this coming on. Mr. McMoiufAN. Our banks never allow themselves to get below 20 per c per cent tax on it in times of stress without putting up anything? Mr. Hamilton. And no additional leaal reserve required to meet it? Mr. Hayes. Keep a legal reserve, of course, but not put up any- thing else with the Government. Mr. Hamilton. That is a good deal along the same line that is the basis of our measure, with "the exception that you go bej^ond the capital, and we try to confine it to the capital of the institutions. Mr. Hayes. I mean a currency that could be taken out without putting up a fund or doing anything except to pay the tax to the Government while it is out. Mr. Hamilton. Who would determine the necessity of issuing it? Mr. Hayes. Let the bank determine it, if it wanted to pay the tax. Mr. Hamilton. Well, if a bank issued that circulation in excess of its capital, and had its full quota of circulation outstanding, that bank would immediately become discredited for so doino-. Mr. Hayes. Whv would it. anv more than it would under the Aldrich bill? 122 CURRENCY LEGISLATION. Mr. Hamilton. The Aldrich bill will discredit the bank issuing it on account of the high tax, Mr. HxVYES. Then why would it any more than your bill, if the currency was different in form from the present bank currency? Mr. Hamilton. Because we are limiting ours to the amount of the capital. We expect a limited amount of the currency to be constantly in circulation, and the public will become familiar with it, as it is now familiar with the bond-secured bank notes. Mr. Hayes. Yes : but if there was a 20 per cent reserve behind these 20 per cent notes, and the reserve was like every other obligation of the bank, and the notes were issued just like our present national bank circulation, the public would not know whether it was in excess of the capital or not. Mr. Hamilton. It is bound to show in any statement made by the banking institution. Mr. Hayes. Oh, yes: it would show in the statement; that is true. Mr. Hamilton. And the public would become aware of it. If you took a reserve citv that would show in the weekly statement, and the institution would instantly become discredited? Mr. Hayes. Well, the other would show, too. Your circulation would show. Mr. Hamilton. Our circulation would show, but the low tax pre- vents the discrediting of the institution. A high tax discredits the bank issue. You are requiring an additional 20 per cent there to the amount of issue, and it is the additional 20 per cent of security in some form or other that increases your rate of tax one-fifth : Mr. Hayes. Could it be avoided in this way? Leave it with the Comptroller of the Currency in the Treasury to say whether the banks be permitted to issue them or not, as a condition for not making the tax so high. Would that change the situation any ? Mr. Hamilton. When you come to that feature I think you are putting a tremendous responsibility on that Dej)artment, in the con- stant demands from all over the country where rates of interest are high, and so forth, for the privilege of this emergency circulation. Mr. Hayes. That is true. Mr. Hamilton. In other words, 3'ou are putting them into the banking business. Mr Hayes. How is that ? Mr. Hamilton. You are putting that Department into the bank- ing business. Mr. Hayes. It is there now, so far as that is concerned. Mr. Mc Henry. Would it not be just as profitable for a national bank to take out this currency at 2^ per cent as it is for it to receive deposits at 3 per cent? Mr. Hamilton. It would be profitable if you could keep the cur- rency out. of course, because you are carrying the same reserve; but our contention is that it is not possible to keep the currency in cir- culation at all times and all seasons of the year. Mr. McHenry. Do you think there are times when we have more currency than we can profitably use ? Mr. Hamilton. Yes: that is unquestionable. It piles up in the reserve cities by the millions. Mr. McHenry. If your bill was in force now do you not think that a greater portion of this issue would be taken out immediately? CURRENCY LEGTSLATION. 123 Mr. Hamilton. I should think it would be; yes. Mr. McIIenry. Do j^ou not believe, still further, that six months from now when business gets to lioin^^ on, and there is a new boom, there will be even greater need for it than there is to-day? Mr. Hamilton. I think you will find inside of six months that you have too much currency now, and that you have an inflation in this country. Mr. McHenry. You will if the business depression keeps up ; yes. Mr. Hamilton. We are in course of liquidation right now, you know, and I think you will find that the interest rates will swing the other way; that there will be an overabundance of money in a short time on account of the financial depression that has been brought to bear in this country; and that comes about, of course, on account of the disturbance of our business conditions. Every manufacturing institution and every line of business has curtailed its business now, and there is one of the greatest troubles with our banking system to-day. It is that it tends at certain periods of years to cause distrust in the minds of the public, has a tendency to cause them to hoard their money, and through the inelasticity of our system the people are compelled to pay excessive rates for money that they use in different seasons of the year. If you had an emergency circulation the rates of interest in this country would be more uni- form the year round, as is the experience in foreign countries where they have such circulation. Mr. Gillespie. You mean a credit currency circulation, and not an emergency circulation? Mr. Hamilton. Yes. Mr. McMorran. Will not that continue as long as the Government continues in the banking business? Mr. Hamilton'. How do you mean in the banking business ? Mr. McMorran. That is, this demand for currency at certain ])eriods of the j^ear is more apt to occur under the present system of our banking system than it would under some other. In other words, the Government to-day locks up large amounts of the people's money, and at a period of the year when the countr}'^ is demanding currency, it is locked up in the Treasury vault instead of being deposited in national banks. If it was out of that business entirely, and Ave liad some form of currency elastic in itself, Avould it not fit the needs of the Government very much better than the present system? Mr. Ha3iilton. The plan we advocate would give us this elastic condition, and would meet the conditions that are occasioned by the Government locking up its surplus money from time to time. It would help to relieve that situation. Mr. ]\IcMoRKAN. One might offset the other. Mr. Hamilton. Well, when the Government pays out its money the emergency circulation would naturally be retired, and you would have a sort of governor between the two. Mr. McHenry. Do you not believe it would be better to have a graduated tax upon this money? For instance, advancing the rate to a certain point if it is kept out four months, and advancing it a little higher if it is kept out six months, in order to force it back and com- pel elasticitj'^ ? Mr. Hamilton. Well. Avhen j^ou adopt a graduated tax, you change the entire nature of vour bill and throw the responsibility as to the 124 CURRENCY LEGISLATION. necessity, the time, and the amount of issue upon some individual, the Comptroller of the Currency or Secretary of the Treasury, perhaps. Mr. Hayes. You might make it a graduated tax for the amount that is out. That might make it a little more certain to be elastic. Suppose you begin with 2^ per cent and issue 10 per cent of that, and for the next 10 per cent raise it. Mr. Hamilton. That must depend upon the length of time it shall stay out, and so on. It makes additional complication. Mr. McKiNNEY. You believe, do you not. that there is and has been under ordinary conditions at the crop moving time of the year in this country an inadequate amount of circulating medium? iNIr. Hamilton. Why, that has been demonstrated fully. It is estimated that from one hundred and fifty million to three hundred million is required annually. Mr. McKiNNEY. In this last trouble that we passed through there was at no time any criticism of the money that was in circulation? Xo one was afraid of the money? Mr. Hamilton. No; they were glad to get it. Mr. McKiNNEY. And there was no criticism. Well, do you not be- lieve it is almost as important, if not inllj as important, in trying to remedy the situation, and to supply more money, that we should sup- IdIv a quality of money that would in no way raise a suspicion as to its value ? Mr. Ha^iilton. Yes, sir; that is very important. Mr. McKiNNEY. Do a^ou believe, under the provisions of this bill that your Commission adopted, that there could be any suspicion of the currency? Can you figure out in any reasonable way how any note holder could lose? Mr. Ha:milton. Xo; I can not possibly do so. Another argument in favor of our measure as compared with a bond-secured currency measure — and it has been fully demonstrated in my mind from the figures that were presented a little while ago — is that in September we had $551,000,000 of bond-secured circulation, and up to December 23 they were only able to increase that circulation $50,000,000; and onr Januarv 1. I believe, the statement that the gentleman presented here showed^that they had an increase of $190,000,000. That was after the trouble was mostly over. ]\rr. Hayes. One hundred and forty million dollars? Mr. IlAMiLroN. Well, the sum total would be $140,000,000. It Avoiild have been $93,000,000 from December 23 to December 31, so it showed that that method of handling it, determining values and get- ting securities, is a very slow process. Mr. Hayes. Six hundred and ninety-one million dollars on the 1st of January and $451,000,000 on the 1st of September. AYere not those the figures? Mr. Hamilton. Five hundred and fifty-one million dollars in September. Mr. Hayes. That would make $140,000,000 increase. Mr. Hamilton. One hundred and fortv million dollars. Mr. Hayes. And all but about $50,000,000 of it in the last week of tlie year. Mr. Hamilton. I do not want to take up all your time, Mr. Chair- man — = — CURRENCY LEGISLATION. 125 Mr. Glass. Let me ask one question right there. Can 3-011 tell me how the Aldrich bill, with its emergency currency taxed at G per cent, could afford any relief in the crop-moving period? Mr. Hamilton. I do not believe that a high-tax bill would ever be of any material advantage to give us a currency at that time — a bond-secured currency. Mr. Hayes. I think your suggestion is correct, that the minute the bank takes out that high-taxed circulation there will be a rim on it. That is about the situation. It will be a flag of distress right off. Mr. Hamilton. If it were announced to-morrow that New York was going to issue that kind of notes all of us fellows in Illinois would commence to transfer our balances. Mr. Hayes. You would be foolish if you did not. Mr. McKiNNEY. Now\ let us take the practical w-orkings of the different bills. ' Under the present system of national banks, when this crisis came on, they were unable to avail themselves in many instances of the privilege of taking out notes on account of the fact that they would have to take out more moneA^ for the Government bonds to secure the circulation than they would secure notes after they had bought them. It would place them in a worse condition, as far as available cash was concerned, than they were in before; and I can not see but what that same criticism would apply measurably to the Aldrich bill. Mr. Hamilton. It will, if they wait until the time of panic to pro- cure them. Mr. INIcKiNNEY. Well, under your bill — I should say my bill Mr. Hamilton. Yes; it is your bill. Mr. McKiNNEY. Under my bill you could secure circulation, and under this limit of taxation, putting up 5 per cent, and all that, to a greater amount than you pay out, you would be better off than you were before. Mr. Haiveilton. You could meet the emergency. Mr. McKiNNEY. You would get more money on hand through that method, although you would have to pay to get the advantage of that. Mr. MoRRAN. How do you figure that out? Suppose you want one hundred municipal bonds The Acting Chairman. He is talking about his bill, and not tlie Aldrich bill. Mr. McKiNNEY. Under the present plan, as you can see, I would have to buy Government bonds to get the circulation, and I would have to pay the premium that would prevail, and then I would be allowed the amount of the face value of the bonds. I have paid out a percentage more in premium than I would get ; so I would be worse off than before I availed myself of it. Under this bill I would not have to buy any bonds. Mr. Hajiilton. Before you close your meeting, gentlemen, I want to make this suggestion to you. It is simply a suggestion as to the strength of this measure in the mind of the public. I am satisfied that if this committee will report this bill to the House with any slight modification that may be deemed advisable, you will be sur- prised at the sup]oort it will have from every section of this country. This measure is like everything else of the =ame nature. In times of prosperity the people paid no attention to its advocates, or those ad- vocatinof such measures. Thev had plentv. and did not think they 126 CURRENCY LEGISLATION. could in any wise be affected by a panicky condition. Even since the meeting of our convention at Atlantic City the conditions have changed, as you Members of Congress all know. There are more students of finance in the United States than you ever dreamed of. Now the people have become alive to the situation, and I could furnish you letters by the thousand, if you had the time to consider them, in- dorsing this measure, and backing up the position taken by your com- mittee last year. The people of the country are alive to the situation, and they are demanding that some kind of legislation be had. Mr. Hayes. That is true. Mr. Hamilton. And another thing in connection with it. One of the strongest features in connection with the proposed legislation is that it can be put in operation without disturbing a single condition that exists, and it is optional with any banking instituton whether or not it ever avail itself of the privileges in this measure. Mr. Hayes. In other words, it is there if they need it ? Mr. Hamilton. It is there if they need it. Mr. McMoRRAN. I do not believe you will ever get any bill through this House until the members from the different districts hear from their constituents. Now, when the bill was introduced at the last session of Congress, I did not get a single letter from my district relative to the bill; and I inquired of the different members of my delegation, and not a single letter had they received. The Acting Chairman. And this same bill was introduced, prac- tically, and argued on the floor. Mr. McMorran. Yes. Now, until there is some pressure brought to bear from every section of the country, on every Member of Con- gress, I do not believe you will succeed in getting a bill through the House. The Acting Chairman. I think only two of us spoke on the bill, Mr. Fowler and myself, about a year ago. Now, let me ask you one further question. Suppose we should see fit, as a committee, to make your notes redeemable over your own counters, or in some redemption agency, in gold Mr. Hayes. Or with the Comptroller of the Currency, the Treas- ury Department. The Acting ChairzmAn. Well, wherever it should be, redeemable in gold. Mr. Hamilton. We would not have any objection to that whatever. The Acting Chairman. That is throwing the burden upon the banks to redeem their own money in gold if they issue it. Mr. Hamilton. Yes, if it is demanded. , The Acting Chairman. And if they do not issue it under the pro- visions of the law, then there is nothing to relieve — instead of adding to the burden now placed upon the Government to maintain all its money upon a gold basis. Mr. Hamilton. Our commission would not object to that. CURRENCY LEGISLATION. 127 The statement referred to in Mr. Hamilton's remarks is as follows : The following is the amount of credit notes that could be issued in each of the following States under the law proposed by the currency commission of the American Bankers' Association: [Capital as shown by Comptroller of Currency's Report September, 1907.1 No. banks. State. 72 2 14 37 128 104 80 24 12 36 87 4 34 395 223 168 304 203 141 37 79 98 20:5 93 253 27 113 38 196 8 56 172 39 404 60 121 361 136 55 733 22 26 87 78 521 18 50 100 45 90 127 29 1 Alabama Alaska Arizona Arkansas California Colorado.... Connecticut Delaware District of Columbia. Florida Georgia Hawaii Idaho Illinois Indiana Indian Territory Iowa Kansas Kentucky Louisiana Maine Maryland Mas.sachusetts. 3, 29, 9, 20, 2 5! 3, S, 1, 54, 23, 7, 18, 12, 10, 8, 9. 17, 59, Michigan ' 13, 6,544 20 3, 28, 3, 12, 1, 5, 19, 1, 159, 5, 4, 59, 4, 3, Pennsylvania '. j 112 Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New .Tersey New Mexico New York North Carolina . North Dakota. . Ohio Oklahoma Oregon Rhode Island. South Carolina. South Dakota . . Tennessee Texas Utah Vennont Virginia Washington. . . West Virginia. . Wisconsin Wyoming Porto Rico United States. 975.000 100; 000 755, 000 690, 000 796,900 123, 500 155, 050 273,985 402,000 995, 000 959, 000 610,000 775, 000 571,250 315,000 127, 500 735,000 031,540 058, 400 989, 920 401,000 743,215 217.500 963,915 341,000 300, 000 955, 000 519, 500 261,770 607, 300 210,000 708, 230 918, 041 109,000 620, 000 395,000 631,800 885, 000 866,000 433,998 700, 250 485,000 287,500 260,000 679,900 180,000 085,000 176, 800 547,750 733, 500 555, 000 585, 009 100,000 3 per cent 5 per cent credit notes, credit notes. SI, 990, 625 25,000 188,750 922, 500 7,449,225 2, 280, 875 5, 038, 762 568,496 1,3.%, £00 998, 750 2, 2:39, 750 152, 500 443, 750 13,642.812 5, 928, 750 1,781.875 4,683,7.50 3,007,885 4.014,600 2, 247, 480 2.350.250 4, 435, 804 14.804,375 3,490,978 5,085,250 825,000 7, 238, 750 879,875 3,06.5,442 401,750 1,302,500 4,927,057 479, 510 39, 777, 400 1,405,000 1,098,750 14,907,950 1,221,250 966, 500 28, 108, 499 1,675,062 871,250 821,875 2,315,000 9,919,975 545,000 1,421,250 3,043,950 1,036,937 1,933,375 3, 888, 750 396,2.50 25, 00 J 6,451,314 I 224,112,828 $996,875 12,500 94,375 461,250 3,724,612 1,140,4.37 2, 519,. 381 284, 248 675, 250 499, 375 1,119,875 76, 250 221,875 6,821.406 2,914,375 890, 9:;7 2,341,875 1,503,942 2,007,300 1. 123, 740 1.175,125 2,217,902 7. 402, 187 1,745,489 2, 542, 625 412, 500 3,019,375 439,937 1,532,721 200,875 651,250 2, 463, 528 239, 755 19, 888, 700 702, 500 549,375 7,453,975 610,625 483, 250 14,054,249 837,531 435, 625 410,937 1,157,500 4,959,987 272,500 710, 025 1,521,975 813,468 906, 1)87 1,944,375 198, 175 12, 500 Total note issue. $2, 990, 625 37,500 283, 125 1,-383,750 11,173,84;} 3,421,312 . 7, 5.58, 143 8.52, 744 2,025,750 1, 498, 125 3,359,625 228,750 665,625 20, 464, 218 8, 743, 125 2.672.812 7,025,625 4.511,827 6,021,900 3,371,220 3,525,375 6,653,706 22, 206, 562 5, 236, 468 7,627,875 1,237,500 10,858,125 1,319,812 4, 598, 163 602, 625 1,953,750 7, 390, 586 719,265 59, 666, 100 2,107,500 1,648,125 22,301,925 1,831,875 1,449,750 42, 162, 749 2,512,593 1,306,875 1,232,812 3, 472, 500 14,879,962 817,500 2,131,875 4,56,5,025 2, 455, 405 2,900,062 5,833,125 594, 425 37,500 112,056,414 , 336,169,242 GEOGRAPHICAL DIVISIONS. 490 1,443 1,312 1,869 1,121 303 5 6,544 New England States... Eastern States Southern States Middle Western States Western States Pacific States Island posessions United States $106,368,800 316,671,028 130,921,520 235,067,965 60,134,351 46,577,650 710, 000 $26, 79, 32, 58, 15, 11, 592,200 I 167,757 i 730, 380 766,991 033,587 644,412 ■ 177,500 $13,296. 39,583, 16, 365, 29,383, 7,516, 5,822, 88, 100 878 190 495 793 216 750 $39, 118, 49, 88, 22, 17, 888,300 751,635 095,570 150, 486 550,381 466, 628 266, 250 896,451,314 224,112,828 1 112,056,414 336,169,242 128 CURRENCY LEGISLATION. RESERVE" CITIES. If the plan of the American Bankers' Association were now a law the banks of the reserve cities could issue credit notes as follows: Capital, na- tional banks. 3 per cent credit notes. 5 per cent credit notes. Total credit currency- notes. Atlanta, Ga , 82,100,000 Albany, N. Y j 2, 100, 000 Brooklyn, N.Y ! 1,602,000 Baltimore, Md ! 12, 740, 700 Boston, Mass ' 26,050,000 Cincinnati, Ohio 13,300,000 Cleveland, Ohio 9,350,000 Columbus, Ohio : 3,550,000 Chicago, lU : 27, 650, 000 Cedar Rapids, Iowa ' 400,000 Denver,Colo . 3,200.000 Des Moines, Iowa 800, 000 Dubuque, Iowa • 600,000 Detroit, Mich •. 4,750,000 Dallas, Tex 2,400,000 Fort Worth, Tex 1,925,000 GalTeston, Tex 425,000 Houston, Tex 2,500,000 Indianapolis, Ind 5,100,000 Kansas City, Mo 3,300,000 Kansas City, Kans 1,000,000 Los Angeles, Cal 5,550,000 Lincoln, Nebr 650,000 Louisville, Ky 4,945,000 Minneapolis, Mirm 5,700,000 New York, N. Y 114,580,000 New Orleans, La 6,025,000 Omaha, Nebr ■ 2,800,000 Portland, Oreg 1,250,000 PhUadelphia, Pa 22,305,000 Pittsburg, Pa 29,100,000 St. Louis. Mo 19,100,000 San Francisco, Cal I 13,800,000 St. Paul, Minn 4,100,000 Savannah, Ga '< 750,000 Salt Lake City, Utah ; 1,200,000 Seattle, Wash 1,750,000 St. Joseph, Mo 900,000 Waco, Tex ' 800,000 Washington, D. C 5,150,000 Wichita, Kans 500,000 §525,000 525,000 400,500 3, 185, 175 6, 512, 500 3,325,000 2,337,500 887,500 6, 912, 500 100,000 800,000 200,000 150,000 1,187,500 600,000 481,250 106,250 625,000 1,275,000 825,000 250,000 1,387,500 162,500 1,236,250 1,425,000 28,645,000 1,-506,250 700,000 312,500 5,576,250 7,275,000 4,775,000 3,450,000 1,025,000 187,500 300,000 437,500 225,000 200,000 1,287,500 125,000 S262, 500 262,500 200,250 1,592,587 3, 256, 250 1,662,500 1,168,750 443, 750 3, 456, 250 50,000 400,000 100,000 75,000 593,750 300,000 240,625 53,125 312,500 637,500 412,500 125,000 693,750 81,250 618,125 712,500 14,322,500 753,125 350,000 156,250 2,783,125 3,637,500 2,387,500 1,725,000 512,500 93,750 150,000 218,750 112,500 100,000 643,750 62,500 $787, 500 787,500 600,750 4, 777, 762 9, 768, 750 4,987,500 3,506,250 1,331,250 10, 368, 750 150,000 1,200,000 300,000 225,000 1,781,250 900,000 721,875 159,375 937,500 1,912,500 1,237,500 375,000 2,081,250 243,750 1,854,375 2,137,500 42,967,500 2,259,375 1,050,000 468,750 8,359, .375 10,912,500 7,162,500 5,175,000 1,537,500 281,250 450,000 656,250 337,500 300,000 1,931,250 187,500 CUBRENCY LEGISLATION. 129 O S 03 3 ^ S3 O — 88 15 -c.£ 88 e8 »■ 2-< c« - q c "o.£ M CO o a •** ^ o C r .11 O tg be c c ■; [c — c = >3 SS ^1 te'S eg 83 — o is is" ss 3c -:5 S'w .S78S1— 08 — 88 ;8 88 88 88 S-*g §S 88 8S cd a ■o o O Q, ■c " is, &S ■ g re c-i 88 88 Cl'-' 88 re to — "fT 00 88 88 11 sg 88 ti s 8 lo s n s c^ i 1 ^^ s S 8 S to C^l ^i 00 « ■-< 5 2 5 10 o »o c? >-'? ^^ -^ c-> S c-5 *.o rj ^H u- * t, ■ — "^ •— 'X rj -* 03 n c « -9* 130 CURRENCY LEGISLATION. a 2 o do M I J. 2 0.2 »• (-1 CO o ti n< o o •^ rd . .Q ,ij n "tS o O o I Oh 2 B A o § oS ^ 1 ^ I -Jfl tcra -d "J^ PS a; ^ cj oj o t- ^ t, ^ W|,0 — ! O O I ; ~ o o o o ■o o u*^ 8 M o3 - - — ci o o o o o o ^ >. ri CO ri ri ri '^^ r~ O O •-= lO "■" g ci S3 § ^ _s = O -1 T "^ ■a' ^"^ '^^ C-l c5co "1 (N m'-«j*" xT -K-Sy^ o" i^-T »— O = KO> 03 ■o>o 5> ~ C^< O » K -r » - sf s" s -.^r^ g g S o io gg o s o S8 g =^07: :o 00 O CO CO •^ coo CO V^ l-O lO cot^ CO '"' IS g ?-' CvftO" tt" «" ^ co" tS'i-T t^ •^"^ +^ '— ? ■rJ-* o t^ CO ■o ■M OJ IM oom 31 t-_^ COOJ ■a- C^ id ^H o" oT ^f t^'o o" cT 9; +2 ~ t^ ■^ KS r^ c-l c-l ¥^ « a 5 = § 5 S o o 8 gs g g 1 ^-5 o o " s o o 9S Q o ss S 5_ {2 s O o o K f-r.;D 'T ^ od" cTo" sa~ 9£ - .-ti > CO CO ~\ . If it ever should be tised, it would have 132 CURRENCY LEGISLATION. to be on the united action of the banks in a particular clearing-house association or com- munity. I -would even be doubtful if any reserve clearing-house association outside of New York City would care to take it out without the cooperation of all the reserve cities in the same section of the country. The taking out of such a currency would be notice to each community using it that an emergency exists and the public would act as they always have and always will act whenever it becomes generally known that an emergency exists. They would start to withdraw their money from the banks and hoard it. But a more important and more radical objection is that the use of it would cripple the national banks (which are 99 per cent commercial banks) in their ability to accommodate their commercial customers. In order to get the necessary bonds to pledge as collateral security for it, they must before getting it invest at least 133 cents for every dollar of it they take out. Whereas if instead of investing in such bonds they should loan their money direct to their commercial borrowers it is self-evident they would have 33 per cent of the amount invested available for such loans. Further, it is a fact that national banks do not invest except to a very small extent in such bonds. As a rule they can not afford to. and, I eing commercial banks, they naturally use their money for the direct benefit of their commercial customers. I have the honor to preside over the largest bank outside of New York City. We carry as an investment a very small amount of such bonds. When the recent currency stringency struck us, we took out $3,000,000 of additional circulation and received on deposit some of the money distributed by the Government for the benefit of the general situa- tion, but, as shown in our statement, we had to borrow nearly all the bonds used by us for that purpose. _ Other banks did likewise, as this was the only basis on which we could afford to use them. It cost us an average of 2 per cent to borrow them. This is what the national banks would invariably have to do before they could avail themselves of such a currency, and it would add to the expense of the circulation this additional 2 per cent, making its use cost 9 per cent. In a money stringency, with its shattering of public confidence and curtailment of credit, in what condition would the banks be to help their customers if they them- selves are obliged to borrow currency at 9 per cent? They might do something to help speculation in Wall street, where alone money reaches such exorbitant rates; they could do nothing for the support of their commercial customers. The principle of the proposed legislation is directly the rcA^erse of what it should be. Something should be done to avoid emergencies and to enable banks to tide their customers over periods of depression. This can not be done by issuing emer- gency currency, the very name of which is enough to breed a panic, nor by exorbi- tantly taxing the banks in the exercise of their legitimate functions. There are many other matters in connection with this currency question involving economic principles which are as immutable as the laws of nature and which are directly opposed to the method of providing a circulating medium proposed in the bill, but I have not time at present to go into a complete discussion of these questions. I should like to show that the currency so issued is absolutely without the element of elasticity in any possible meaning of the word. No currency can be elastic that is issued to the hanks before it is issued by the V)anks, as no stich currency can possibly adjust itself in the volume of its circulation to the actual daily reciuirements for it in commerce. Elasticity is the daily adjustment of the volume of the circulatiTig medium between the banks that issue it and the public that uses it. There can l)e no such adjustment in connection with the currency proposed. The circulation, arbitrarily fixed in vol- ume, of a secured currency is one ])rincipal cause now of the periodical panics which occur in this coimtry, and to add such an emergency currency as is proposed, similarly secured, seems to me to be an operation not unlike the giving of a drunken man full of whisky a dose of brandy to sober him. This illustrates from my point of view just what the effect on the financial condition of the country will be l)y injecting or attempt- ing to inject into the currency a circulating medium such as is ])roposed. It would aggravate any condition of emergency existing instead ofc correct iiig it, and the use of it would produce an emergency even when none existed. You also aSk me if I am opposed to the (Toverninent guaranteeing bank deposits and if 1 will give you my reasons therefor. I am very (UH'idedly opposed to such a proposition, and my reason is that if the (Jlovenuiient is going to guarantee the deposits of all hanks it completely eliminates the necessity of the public discriminating between one hank and another. The old-estahliBlied l)ank witli a record of many years of con- servative management and accunuilated .strength would become just the .same in the eyes of the public as a hank in the hands of speculators or incompetent or dishonest managers. CURRENCY LEGISLATION. 138 • Ultimately the banks lioue.stly maiia.2;ed would have to pay for the escapades of the dishonestly managed banks, and there would be no merit in excelling in conservatism or ability in management. It would bo introducing into the banking business of the country the grossest error that now exists in connection with labor unions. It would reduce all bankers to the same level, and there would be absolutely no reason why anyone should not drop into the lirst bank he came to to deposit his money. The Government being responsible for the deposits puts all on an equality and makes all equally good. Besides this, I think it would be practically socialism for the Gov- ernment to undertake the guaranteeing of the enormous deposits in the banks. The stockholders of the banks supply the capital and under the law are liable for double the amount of the capital subscribed. They have been accustomed to get for supply- ing this guaranty to depositors all the profits that can be made in the business. Why the Government should similarly guarantee deposits even if the banks are taxed for it, without getting the profits in the business, I gan not see. If the Govern- ment is going into the banking business to the extent of guaranteeing all the deposits, it had better go into it direct and make all the profits that can be made out of it. I have had to hurriedly dictate these opinions, and they are probably not as clearly or as well expressed as I would like to express them had I more time at my disposal, but I think they will indicate to you my conclusions and to some extent at least the reasoning which has led me to them. The Acting Chairman. I would like to say that the committee has been very much pleased with the manner in which each question has been promptly and squarely answered. You have not dodged anything, whether it came hard or easy. Mr. Hamilton. I wish to express my thanks to the committee for the courtesy and patience you have shown; and I wish to add this thought that has just occurred to me, in further support of our meas- ure. That is, that the issuing of the clearing-house certificates by the different commercial centers has shown the value of the assets of those institutions; and while they have been issued with question- able authority, yet it is shown that such commercial assets are good security for a credit note issued. Mr. Hayes. It shows that the people there so regard them. Mr. Hamilton. Yes; and the people so regard them m time of emergency. (The committee thereupon adjourned subject to the call of the chairman.) Committee ox Banking and Currency, House of Representatives, Tuesday J Fehruary 4, 1908. The committee met at 10.30 o'clock a. m., Hon. Charles N. Fowler (chairman) in the chair. The Chairman. Gentlemen, Mr. Cow])erthwait, of New York, has come down here to be heard, and we will now proceed, if there are no objections. STATEMENT OF MR. J. HOWARD COWPERTHWAIT, OF 154 WEST EIGHTY-SIXTH STREET, NEW YORK CITY, N. Y. Mr. CowPERTHWAiT. Mr. Chairman, do yon wish me to proceed in my own way, or do you wish to ask me questions? The Chairman. The time is yours. Proceed and tell us what you think we ought to know. Mr. CowPERTHWAiT. I would rather not put it that way. I think perhaps 3'ou know more than I do about the subject. I would like to state, gentlemen, before beginning, that I have alwa3^s been in active business in New York City and entirely outside of pohtics and outside of banking, and all that I know about this subject is what I have studied during my whole life and in carrying on rather a large business. Mr. McKiNNEY. What line of business are you in? Mr. CowPERTHWAiT. The retail furniture business. Mr. Gillespie. What is the extent of your business a year? Mr. CowPERTHWAiT. About a million dollars. The firm is Cow- perthwait & Sons. I think there is one important fact to consider, and that is that ever since we have had this bank-note system, for more than forty years, we have always gotten out of difficulty b}' the use of clearing-house certificates and clearing-house scrip. There is no case that I know of any panic in this country since this banking system came into use but we have found that way out of the difficulty, and in all that time, so far as I know, none of this scrip or none of these certificates have ever been the occasion of the loss of a dollar to anybody; and always when this money has been issued — this substitute for money, or what- ever you might call it — it has been redeemed within a very short time, and there has never been any disposition on the ])art of banks that have put it out to keej) it out. It has been absolutely elastic. It came into being when it was needed and went out of use just as soon as the need for it had gone })y. Now, I argue from that that clearing- house scrip and clearing-house certihcates are the natural cure for a panic, imder our present system, because they have worked so well during these forty-odd years, and I claim, reasoning from that, it is proper to say that by a further use of this sort of money, not guaran- teed by the Government, but backed up by some legislation, some very slight acknowledgment on the part of the Government that that is a good .sort of substitute foi' money, panics could be avoided. 134 CUERENCY LEGISLATION. 135 I do not think that you can avoid the great periods of depression that naturally follow the great periods of exaltation, as you might say. I think when prices are very high and speculation is rampant, and business very good, when we hiixe what we know as a period of great prosperity, in that period j^ou sow the seeds of adversity; and as one extreme succeeds the other, as a jnatter of course, when we have a period of adversity and everj^body is economical, you then sow the seeds for a new period of prosperity; and I believe that that will go on just as long as human nature is as it is, and unless you can change luiman nature you will be unable to change that great difference between the period of high i)rices and great prosperity antl the period of adversit}'', one succeeding the otlier and one causing the other, you may say, because when people are making money easily they then invest easily, and these people like Morse or Ryan or Ilarriman, or any such person, can easily float his securities, and the higher the state of prosperity the more he can float; and then you reach the period when something happens like the failure of the Knickerbocker Trust Company in New York, some little thing after you have reached the highest point happens, and people begin to think, and then you are in a panic the first thing you know. Then after that jou have a long period of depression and economy, building up for another period of prosperity, in the natural course of events. It seems to me that the Government should recognize not alone the clearing house of New York, but every clearing house throughout the country. If the Government could give some slight recognition to these great institutions, I think that then just before a panic some clearing-house money, clearing-house certificates or scrip, or whatever you call it, would come into use all over the country, and I think every crop season throughout the West and the South it might in due time become a matter of course that these certificates would be issued. For instance, when the cotton crop begins to demand money, as I believe it does in July, if I am well informed on that, I should like the Clearing House Association of New Orleans to issue clearing-house scrip to the banks that form that association, taking from eacli bank securities or commercial papej;- to the extent of, say, 133 J per cent of the amount of scrip that they issue. I believe that is the rate that they have generally gone by; that is, 75 per cent of scrip issued on 100 per cent of securities at the market value. I think if that was done as a matter of course everv year, within a very short time we would have in operation in this country what would be the counter- part of the great central banks of Europe. I think it would be almost exactly that, a rediscounting custom in periods of tight money. People claim that tlijs clearing-house money and scrip is no good in domestic exchange. That is one wa}' to put it, but you can say that money issued by the Bank of France or money issued by the Bank of Germany is no good for exchange between those two coun- tries, and that is so; but it is })erfectly good within the country, and it releases an immense amount of gold for use in the exchanges be- tween the countries. So here, if New York City banks coidd issue clearing-house scrip at the very beginning of a panic. I think that would release an immense amount of Government money which would be shipped to creditor banks in the interior for the use of domestic exchange. 136 CURRENCY LEGISLATION. Mr. Gillespie. Who would decide, in your opinion, when it was necessary or proper to resort to these clearing-house certificates or money? Mr. CowPERTHWAiT. I would first expect clearing-house associ- ations to be reorganized. You know that now they have a very loose organization. The Clearing House Association of New York City is not even incorporated. The Chairman. None of them are over the country. Mr. CowPERTHWAiT. I am more familiar with the New York Clearing House. Now, if instead of that organization you had a great clear- ance bank, I should say that the board of directors of that bank could act in a moment; there would not be any waiting like there was in this last panic; but I, should say that the board of directors could act in one moment and issue clearing-house scrip, and the manner of issuing it makes it absolutely safe. As I have told 3'ou, there has never been a dollar lost on an}" of this scrip or on any of these cer- tificates, and I think it is perfectly proper to leave to an association, to a great bank, the right to issue, the Government limiting the quan- tity; to give the right to the bank to do that whenever it sees fit, because that great bank takes the risk. The Government does not take any risk; the bank takes the risk. There was no scrip issued in New York, as there was in the West. Suppose that a bank in New York applies for clearing-house certificates, the clearing-house asso- ciation issues them, and it takes the securities of this bank, and then it assumes that risk. It becomes responsible. It has to redeem these certificates. I think where an association takes the risk itself of issuing this money to its member banks, that it is quite proper that it should do it when it sees fit. Then you catch the panic at the very instant it begins, not waiting until the patient is in convul- sions. In a panic there is no time to communicate with Washington. Mr. Gillespie. That would not be an emergency currency, but normal ? Mr. CowPERTHWAiT. It would be a currency; it would be a supple- mental currency. I would not disturb our banking system, because I do not believe you can do that for a long time to come, and I do not beheve it is necessary; but I would have this as a supplemental cur- rency to be issued anywhere throughout the country, limiting the amount to the locality, and suitable to the responsibility, and the Government overseeing it to the extent that there should be no fraud committed, and that there should be sufficient security back of the currency. My pet idea is to pro\dde money for moving crops. I live in New York City, but I think the most important considera- tion in any currency measure is the facility of mo\dng the crops. That is a great thing to consider. It is not the prices of securities in New York; it is not to help speculators there, but that the farmers and the planters sliould be able to move their crops as soon as thej' are gathered and to obtain money or what ^v^.ll answer for money for the time being. The idea I want to convey is the necessity for the recognition of clearing-house associations, and helping them to develop into great clearance banks, some recognition which would mean that they would issue money whenever it is needed to a very limited extent. Mr. McKiNNEV. The (Icaring-house jiioney that would be issued Would neces.sarilv be larirelv a lofal monev. would it not, for local use? CURRENCY LEGISLATION. 187 Mr. CowPERTiiWArr. I was out in Kansas City a wliile aject to checks. Wliat is inflation? It is basing one cre(Ht upon another, and if it is based upon the metal, the metal of the country is gold, and if you have nothing in reserve but gold, it does not ]iiake any difl"erence liow many credits you have out nor what the form of tho.se (Tedits is. You can only get inflation — I am speaking of bank crecHts now, and not of the price of goods — by bas- ing one credit on another credit; is not that right? CUERENCY LEGISLATION. 189 Mr. CowpERTinvAiT. You ^ei ])ank inflation in tliat way. But we liave had such a thing as inconvertible paper money; for fourteen years after the civil war we had paper money, which v;as not con- vertible into gold. The Chairman. What was that? The United States money; green})acks and United States notes. Mr. CowPERTiiWAiT. You had the whole power of the Government behind it, but it was not suHicient to bring it to a par with gold. The Chairman. Yes, that is true; the best currency that the world has ever had was worth only 75 cents on the dollar, simply because it was not based on gold. Mr. CowpERTHWAiT. I sliould say that you can make the currency absolutely safe; by your bill it seems to me it would be safe. It would remain on a par with gold. But I do not think it w^ould be sufRciently elastic for this country. Mr. Fowler. Most people think it would be too elastic, but I think it would be just elastic enough. In other words, I think it would go and come precisely in accordance with the requirements of trade. I know it; I do not think so at all; I know it. Mr. CowPERTHWAiT. I do not believe, Mr. Fowder, that I am suf- ficiently familiar with a point like that to state how it would operate under your bill. If you want me to, I will branch off to that subject and I can tell you the objection that I have to your bill. The Chairman. Let us not get away from the subject. We are talking about credits. The question is how can you expand or con- tract cretlits, or how it can result in inflation through a bank taking deposits if based on gold — that is, how they can inflate by basing credits or bank notes on gold. That is w^hat I w^ant to find out. Mr. CowPERTHWAiT. I think that it w^ould depend on the percent- age of the gold. The Chairman. Of course our conversation is based on a right reserve, such as the national banks have to-day. Mr. COWPERTHWAIT. I do not think they have a right reserve. I do not think they have in New York City. The Chairman. You do not think that 25 per cent is enough for New York City « Mr. CowPERTHWAiT. No, sir; T do not think 25 per cent is enough for New York City. The Chairman. Do not let us have a collateral question come into it. Assume that the right reserves are in gold, and there are the right issues, how can you have inflation? Mr. CowPERTHWAiT. You can not. The Chairman. Then let us make a distinction here. When you have reserves in gold, you never can have inflation. You can have expansion, but not inflation. There is a very distinct difference between expansion and inflation. If you continue to expand your bank credits and the reserve stands still, that is expansion but not inflation. You only get inflation when you })ase one credit on another credit. The other is ex]iansion pure and simple, expanding credits and limiting your reserves to a given quantity and not keeping your reserves pari ])assu in amount witii your creilits: that is ex]ian- sion and not inflation. Mr. CowPERTHWAiT. I tliiuk there is no (piestion at all, from the experience of Europe, that if you have a i)roper reserve of gold you 140 CURRENCY LEGISLATION. will have no trouble. I think there is no question about that, because that has been settled for a hundred years, you might say. The Chairman. If you have your reserves in gold and a perfect facility of transferring from a book credit to currency you can not have inflation. Mr. CowPERTHWAiT. While this discussion is on in the country I would like to see something done to get rid of the prejudice of the American people in favor of only money guaranteed by the Govern- ment. That is a peculiarly American prejudice, and it is almost uni- versal. I think ninety-nine men out of one hundred, if you have anything to say to them about currency and give them a chance to answer on that point, would always say that they want the Govern- ment behind the currency. Mr. James. Do they not get that fi'om the Constitution? Mr. CowPERTHWAiT. Behind the paper currency; the Constitution? ^Ir. James. Behind any sort of currency? Mr. Cowpertiiwait. I do not know that. Well, there may be some law in it, but I do not think most individuals understand it in that way. Of course I accept what you say, but I think they look on it as the stamp of the Government making it good. That is not true in any other country. Mr. James. Do they not look on the right to coin money as a gov- ernmental function, like the right to collect taxes or take any other governmental action? Mr. Cowpertiiwait. It seems to me that the true function of the Government in regard to monev stops with the coining of money. Mr. Gillespie. I agree with you on that. Mr. CowPERTHWAiT. I think that is the practice that has gone on in Europe, and I think that is the true practice. Mr. James. But you disagree with the Democratic platform when you do. The Constitution is above every platform. Mr. Gillespie. I admit that. Mr. McKiNNEY. Did you state in your remarks that there was to be a limit; that the limit of the issuance of clearing-house certificates was to be determined by the clearing-house itself? Mr. Cowpertiiwait. I should say that if clearing-house associa- tions were empowered to issue this sort of money — understand me, not guaranteed at all by the Government — nobody being obliged to take it unless they saw fit, it simply being a promise to pay by a clearing- house association, that even so, every clearing-house . association should be limited in the amount of money that it can issue, should be limited by thecoml)inetl capitals of the banks which are in the clearing- house associati(m. It seems to inc to be much more proper, for instance, for a New York City bank to issue S100,()()0,0()() of this sort of currency than for a clearing-liouse association of two or three banks in a far Western or Southern city to issue $10,000,000. I think the issue ought to be in proportion to the responsibihty behind it. As to exactly where you woidd draw the line, you might (h'aw the line at the combined capital of the ])anks that formed the clearing-house association. "hOu would want enough responsibility behind it so that there would be no fraud committed on the people, and if you did not limit it they might succeerl in getting a very large amount afloat, and that would be a hardship on the i)eople of that section. CURKENCY LEGISLATION. 141 Mr. Weeks. If it had good security behind it, would tliat be any harm^ Mr. CowPERTiiWAiT. It would be all right if they had the security behind it; but then people are human, and it might get afloat, ancl you might suppose there was the security when there was not. I would have it limited in both ways. I should like it absolutely safe, without a guarantee of the Government. Were you speaking about money being oversupplied, Mr. Crawford? Mr. Crawford. Yes. Mr. CowPERTiiWAiT. I was talking with a merchant in New York some time ago, and possibly some one here might have the same views that he had. He was quite a successful man. There are about $346,000,000 of greenbacks, I understand, in the country, and that whole amount stays in this country. There is no question cm that point. I said to him that that does not prove there are S34(),000,000 more of money in this country, and he said he thought it did, because it was here. Then I called his attention to what I thought was a verv' important thing, that ever since those greenbacks were issued we have been exporting gold and importing gold, settling balances of exchange in that way, and whenever we have had too much money, and the rate of interest has been too low, we have exported gold, and w'iienever the rate of interest has been too high, and there has been a shortage of gold, we have imported gold and sold securities, as we have been doing lately. I claim that as a scientific fact the $346,000,000 of greenbacks increases the total stock of money in the world, and that is all it does; that the amount of money in the United States is increased bv this $346,000,000 simply bv the propor- tion of that $346,000,000 that belongs to the United States in the ordinary covirse of its business, and I should say that if you should take that $346,000,000 out of existence, say during the next ten years, little })y little, whenever it came into the hands of the Government, after that period had ])assed you would have nearly as much money as if you did not take it out of existence. Y^ou would export so much less gold. The Chairman. Gold would take its place? Mr. CowPERTHWAiT. Yes. The Chairman. Absolutely i Mr. CowPERTHWAiT. Or something else would take its place, possibly national-bank notes, possibly something else; but I believe that so long as you stay on a gold basis it is absolutely impossible to increase or decrease the amount of money in the country unless you go to extreme measures. Y"ou could, of course, annihilate a large amount of money — wnpe it right out of existence. There is an old economic natural law, discovered by Sir Thomas Gresham, and I do not know as I ought to speak of such a simple thing as that, for it has been known for three hundred years and 1 believe there is no dispute that it is an absolute law from which nobody can get away, that in every country the poorer currency drives out the better currency. It has hai)pened in England, and everywhere, and the more you issue the poorer currency the more the better currency goes out of the country, because people have to use currency for the debts they settle, and the better money is always demanded for the foreii^n debts. 142 CURRENCY LEGISLATION. The Chairman. That is, you have the poorer currency for tlie com- mon use, for which the good was used? Mr. CowPERTHWAiT. Yes. The Chairman. So that it does not follow that the poorer currency will drive out the better unless they are both treated on the same basis ? Mr. CowPEKTHWAiT. Oh, yes. Mr. Weems. It depends on the difference l)etween the values of the two cjirrencies ( Mr. CowPERTHWAiT. You will pay your debts within the country with the poorer kind of currency. The Chairman. But if you reduce your bank credits and all your reserves are held in gold, then it will not drive out the gold? Mr. CowPERTHWAiT. No, sir; not if you arbitrarily fix the amount of gold. Of course you can not drive it out. If you can arbitrarily fix it, it will not be driven out. The Chairman. You can fix it in the reserve, and if all credits of banks were based on gold, then the banks would be compelled to buj'' gold, as they did in Louisiana before the war, and the State of Louisi- ana had more gold than any State in the United States except New York, simply because they were compelled to buy gold to do business. !Mr. CowPERTHWAiT. Yes, sir. I think in this last panic the money that was issued by the Government will have the effect of driving that much mone}' out of the country. The Chairman. What do you refer to; do you mean the bank-note circulation i ^Ir. CowPERTHWAiT. The}^ sold the Panama Canal bonds; you know. The Chairman. You mean the bank notes that were based on them ? ^Ir. CowPERTHWAiT. YcS. The Chairman. Only so far as those bank notes would be used for reserves. To that extent, yes. Mr. CowPERTHW.viT. Gold has begun to go out already. The Chairman. Certainly. Mr. COWPERTHWAIT. And I think more will go out because of that issue of money than would otherwise be the case. The Chairman. Certainly, because they use the bank notes for reserves; they are constantly putting bank notes into the reserves of the country and undermining the credit of the country. Mr. COWPERTHWAIT. I should think that the gold would leave the country unless the Government should absorb it and pile it up, and I do not sii|)pose it can do that very readily at present. Mr. McKiNNEY. It is generally believed throughout the country that the issuance of clearing-house certificates at any center comes about as a last resort on the part of the banks of that center on account of depleted reserves, and on account of its being an abso- lute necessity to keep the banks (>])on. Mr. CowPERTHWAiT. 'i'es. Mr. McKiNNEV. That issue is generally deprecated all over the country; and under your proposal, if you adopt that as a systemand the banks have a right at any time when the reserves are too low to issue such certificates, would not that very system, popularized CUBEENCY LEGISLATION. 148 by your proposal, tend to careless banking on the part of the members of a clearin2; house? It would make no particular did'erence to them, because they would say, "Suppose our reserves do get down too low, we can issue certificates." Mr. CowPERTiiWAiT. In my proposal in the pamphlet I issued I put a heavy tax on this clearing-house scrip and these clearing-house certificates, and I put it in this way, that I thought the second half of the year, which was the crop-gathering season, when the country needs more money than it does in the first half, unless you are using money for speculation, when the country needs more for legitimate business, I should say then that this scrip might be issued in the way I propose, and it should be limited. That would cover a part of your question, limiting the amount. I should say during the second naif of the year the clearing-house associations should be permitted to issue this scrip without any tax, but beginning on the 1st of January I would have the Government tax it even to the extent of 1 per cent a month for all that was then outstanding and the redemption of which was unprovided for. The Government inspector should have the amounts, and know every month what was issued and what banks issued it. The inspector should report that such and such a bank had had so much of this scrip issued and no reserve provided to meet it; consequently that bank would have to redeem it at once or pay the tax, and in that way you would have elasticity. Mr. Weems. Do you think these clearing-house certificates have ever done any harm? Mr. CowPBRTHWAiT. No ; I do not think they have ever done any harm. Mr. Weems. Then why would you tax them? Mr. Cowpertiiwait. Issuing money is a sort of a prerogative of the Government. Mr. Weems. They have always been promptly retired? Mr. Cowperthwait. Yes. Mr. Weems. Under the operation of what influences have they been retired ? Mr. Cowperthwait. I think as a supplemental currency. You want money to move the crops. If you issue money to n\ove the crops and then it stays in circulation, it helps to advance prices and to encourage speculation and to create overconfidence, and you have nothing to issue when the next period of crop moving comes around. I think it ought to be a supplemental currency issued in the second half of each year when you are moving crops, and it ought to ])e issued right where the crops are moved, and then 1 think it ouglit to be promptly put out of existence. The Chairman. It has gone out of existence, has it not i Mr. Weems. It promptly goes out of existence. Mr. Cowperthwait. Yes; it has done so thus far. but I would make very sure of it. Mr. Weems. It always has done so, has it not ? Mr. Cowperthwait. Yes. The Chairman. How do you know it will not ( Mr. Cowperthwait. I do not. The Chairman. Would you not rather trust to what had happened than to what you think ought to happen^ 144 CURRENCY LEGISLATION. Mr. CowpERTHWAiT. Xo : because what has been done so far has been somewhat in violation of law. That is, it is supposed to be in violation of law; but it has been such an absolute necessity that peo- ple have been willing to have a bank issue it rather than to have it fail. Mr. Gillespie. Did not the in 1893 give an opinion that these clearing-house certificates were not in violation of law? Mr. CowPERTHWAiT. I do iiot kuow; I am speaking of a general impression. I do not know about the law. I have talked with a number of bankers in New York recently, and they talked as though it was in violation of law. I have never looked up the law, and I am not a lawyer. I supposed it was. But of course if there should be a law passed recognizing them in any way at all, then there would be more of a tendency to keep them out, and if they stay out during the whole year, then you have no elasticity of the currency from them, if they are going to be used to foster speculation. I think that is a long way off, when anything will be done that way, and it seems to me that the business in hand now is to defeat the Aldrich bill. That is the impression I have. Mr. Gillespie. To defeat the Aldrich bill? Mr. CowPERTHWAiT. I think so. Mr. Gillespie. ^ATiat is your criticism of the Fowler bill? "\ATiat is 3"our main objection to it? Mr. CowPERTHWAiT. The guaranteeing of deposits in the banks seems to me to be a fatal objection to it. Mr. Fowler has tried to convince me the other way, but I am afraid I still stay where I was. Before I came here I talked with a number of bank presidents, and they agreed on that same view. I held that view before, and I am somewhat fortified by what they said. One of them even went so far as to call it a criminal idea. I do not give you that as my idea. Mr. McKixxEY. What kind of an idea? Mr. CowPERTHWAiT. He thought that it was criminal for the Government to guarantee, or that there should be any guarant}^ of deposits. The Chairman. A little experience that I had up in New York on Thursday will be relevant on this point. The merchants' associa- tion, from which I have a communication here in regard to another bUl, has approved every section of that bill with that exception, and the committee having it in charge commimicated with me, and I went before them, and the}' said that they had had the vice-presi- dent of one of the large banks of New York before them, and they said that he did not seem to have thought ver}^ much about it, and they wanted to talk with me about it; and before I had gotten through with those four men that afternoon I think they were all con- vinced absolutely, from what they said to me, because the chairman called me up the next day and virtually said that they had agreed that I was absolutely right in my contention, and that this matter of a few big bankers opposing the thing was based simply on the fact that they were not going to have the advantage of twenty-five years of ])restige, and tlie advantage that they thought they had because of large capital, and for certain other superficial reasons; but they were convinced that J was right just as 1 pointed out to them there, and this man told me the next day that 1 was ab.solutely right in ni}^ contention. The point I want to make, therefore, is that the bankers that had come to them stated that they really did not know anything about it. but it was nn imj)ression they had. CURRENCY LEGISLATION. 145 Mr. GiLLESPii':. What do you think of the idea of national banks dong a savings bank and trust business? Mr. CowPERTiiWAiT. I should think that that was wholly wrong. The Chairman. What do you think of the trust companies doing a national banking and coinnicrcial business? Mr. CowrERTiiwAiT. 1 think that is wrong too, unless they keep proper reserves. The Chairman. Do you know of a State in the United States where the trust companies are not doing everything that my bill proposes they shall do? Mr. Cowperthwait. I do not think they will continue in New York. They have lost a large share of the deposits; the people have caught onto it, and I do not think they will get the deposits they had. The Chairman. \Miy not, after the people get over this scare? These companies offer 3 and 4 per cent interest on deposits, and at a bank they could get only 2 per cent, and why will not foolish peo- ple deposit with them, just as they did at the Knickerbocker Trust Com])any? I understand they had all the ladies from uptown doing business there, simply because they were paying them 4 per cent on their money. Mr. Cowperthw^^it; They can get tliai sort of money; but they have had merchants' deposits, many of them. One little company in which I am a director had an account with one of the trust companies, and as soon as it got into trouble we drew a check on it and got the money out. We did not get on the line, or anything like that: but I made up my mind that they were not entitled to any consideration at all, because they had not been doing a proper trust company business. The Chairman. There is no trust company in New York that does. Mr. Cowperthwait. They will dq better than they did before. The Chairman. They will do just the same. Under the banking law providing for 15 per cent reserve that the committee reported up there, that does not prevent them from doing a banking business in every respect except discounting commercial paper. Mr. Cowperthw^ait. I would like to have you tell me of any other State where the trust companies have not been doing the same thing? The Chairman. Have we not got to legislate for all the. country, and not for ideal conceptions? Mr. Cowperthwait. That is verj^ well, if you can; but I have hopes that by the developed clearing house associations Mr. James. What is your objection to a tax being levied upon the national banks by the Government pro rata to the deposits, creating a fund in the hands of the Government as a trustee for the purpose of securing depositors? Mr. Cowperthwait. I think such a law would lead to veiy unsafe banking, and, to give my own experience, we have accounts in half a dozen banks, and in opening a bank account we consider the safety of the deposit, and we also consider how much money we can borrow from the bank, we doing a mercantile business, and I tliinlc those t^yo questions come up with everybody in opening an account — that is, a merchant's account. If we had only one thing to consider, as to how much money we coulil borrow from the banks, we should natur- ally open accounts in the banks that were willing to do the most risky sort of business. I think that principle would apply throughout the "country. I think instead of the banlvs doing business in such 37381—08 10* 146 CURRENCY LEGISLATION. a way as to be absolutely safe they would lean the other way; they would bid high for business. The Chairman. How high: in what respect ? Mr. CowPERTHWAiT. Not necessarily in bidding for deposits. There are other ways. The Chairman. Will you explain to this committee how it is done? Mr. CowPERTHWAiT. It is done in a great many cases. We go to a bank and we arrange with them to keep an account, and we agree to keep certain deposits and they agree to lend us a certain amount of money. The Chairman. Three or four times your balance, at a certain time of the year ? Mr. CowPERTHWAiT. Yes, but limited also to the total amount. The Chairman. I understand a certain amount. Let me ask you another question, as a banker. What does a banker base that on? Mr. CowPERTHWAiT. What does he base it on? The Chairman. Yes. Mr. CowPERTHWAiT. There is competition among bankers for busi- ness the same as there is among the rest of us. The Chairman. What does he base it on ? When you go in and say, "1 am going to keep an average balance of $10,000," he says, "At a certain time of the year you want more mone}^ than you do at other times," and you say, "Yes. " He says, "How long do you want it?" You say, "Two or three or four months," as the case may be. He says, "If you want it three months, I will give you five times as much as your average balance is. If you want it one month, I will give you ten times as much as 3^our average balance is." Now, under the national-bank act, where you have got to carry your reserves in o;old and all of your credits, whatever they are, are based on gold, now could any banker agree to do an unsound thing for you unless he had deposits that were deposited by others which he was using, or as a supplement to it, and as a prerequisite to it, he must have capital and surplus with which to meet his contract with you. How can he do an unsound business with you? Mr. CowPERTHWAiT. Why we have near our store two banks, and both of them want our business; they are both anxious for it. One bank will say, "We will lend you $40,000." That bank knows very well it is competing with the bank on the corner and the other bank knows it, too. I should sav, under vour law, that instead of $40,000 they would say $50,000 or $60,000. ' The Chairman. Where are they going to get the money to loan you? Mr. COWPERTHWAIT. Oh, they have got— they do not take my mone}', necessarily. The Chairman. This is a t)anker's question. I have been in the banking business myself. If to-day they are bidding, and they say they will loan you $40,000, do you not think they are looking around to see where they will get the $40,000? They say, "We have got to supply Mr. Me Kinney and Mr. McCreary, and all iiese fellows, and now we will talk it over; how much can we let them have? We can let tliem have $40,000." What is that based on? It is based on their average deposits in that bank, and upon their resources in profits, surplus, and capital. If they are straining every nerve to-day to get your business, and loan you $40,000, they can not loan you $1 more after you have guaranteed it, and I challenge you to point out how. CURRENCY LEGISLATION. 147 Mr. CowPERTHWAiT. Tliey can not . they have been good speeches, instructive, and thev have all received al)()ut the same a})])lause, and all from the sanii' pry theory and })ractice of the foreign exchanges to-day. If the premium on gold in the case of the paper currencies of Brazil or the Argentine rises, at once there are a hundred New York mer- ODRRENCY LEGISLATION. 175 chants who declare that what they sell to Rio or Buenos Ayres is seriously interfered with. Then why not admit that a fall in the price of silver bullion, or, in other words, a rise in the gold premium on every exchange in Asia with its eight hundred millions is a bar to the business of every white trader? Recall that when the government of India in 1897 negatived the proposals of the Wolcott Commission, which proposals had as their aim to restore the rupee to its old exchange of 10 to the sovereign, the governor of India said "the sudden rise in the rate of exchange would kill our export trade, for the time at least," meaning that the export trade in wheat, cotton, and other staples would be killed until gold prices in Europe rose to the equivalent of the rise in exchange. India is, of course, the ward of our nation, and any currency legisla- tion which will have the effect of increasing the monetary use of silver in the West and thus raising the bullion price of silver against the East and which will check India's exports and stimulate ours, strikes Parliament as questionable; at least it is hardly for us to take the first step; it is for you Americans to move, and it is undoubt- edly your interest to do so. Mr. Chairman, I have outlined, however briefly and cursorily, the position which you would assume did you here apply the proposal made for us by our chancellor of the exchequer, Mr. Goschen. In the first place you would have a great "war chest," a great central reserve of "free gold" at the disposal of the Treasury, available in the event of war or in the event of panic. During the next twenty j^ears this gold reserve might accumulate to say five hundred millions. The second point is that the absorption of silver to secure these small notes would make the conditions of mining in your Mountain States active and profitable, and silver is a national industry" which in regard to the per capita wealth product of the laborers employed is the most valuable industrj^ you have. In the third place your absorption of silver would raise the exchange rates with eight hundred millions of those producers in Asia whose exports to European markets com- pete with your own; the rise in exchange would impair their power to compete with you in Europe, and thus add greatly to your bal- ance of trade and give you a greater control through your exchanges over the gold markets or Europe. And also the rise in silver exchange would enable you to sell goods in Asia at a profit where to-day there would be a loss. The situation of silver to-day is a very interesting one, and I ^^dsh I were able to explain in the short time at my disposal the extraor- dinary position in which the government of tndia finds itself. The attitude of that government is all important when we consider this question. According to the latest of your Treasury reports the world's production of silver at present is a hundred and fifty million odd ounces. Now, the government of India, according to their lat- est financial report, purchased last year 90,000,000 ounces to convert into this coin [producing a rupee], coining at their mints more than 222,000,000 rupees in a single j'ear. Again, the absorption of silver in the arts and manufactures, as given in your report, amounts to 50,000,000 ounces annually; so, in efi"ect, the entire silver produc- tion of the world is being purchased by the government of India and by the world's silversmiths. When the Indian mints were closed in 1893 Sir James Westland was finance minister. He was unfor- 176 CURRENCY LEGISLATION. tunately the onl}'^ finance minister that India has had in my time who laiew nothing either about currency or exchange questions. The Indian mints having been closed to free coinage, Sir James West- land's idea was to apply a gold standard — yes, but a gold currency also; and this latter was ridiculous and quite impracticable. How- ever, to carry out his idea during the years from 1893 to 1898, Sir James not only coined no rupees, but he melted up large numbers, selling the bullion for gold, intending to give this gold in the form of currency to India. But all that he was able to spare to the melting pot during the five years from 1893 to 1898 was 19,000,000 rupees, not one-tenth of the number of rupees that the government coined last year, and yet the contraction in India's currency resulting from five years' cessation of coinage and this small melting induced a veritable money famine. So terrible was this money famine that in 1898 rupee loans were made in Bombay at 2 per cent per month on the security of gold bars. At this point the Westland experiment broke down, for the cur- rency famine took on the appearance of a food famine; a quarter of a million people were being fed by the State, while thousands died. Rice and small grains were not really very scarce, but there was no money up country with which to buy or move them. In short, starv- ing the Indian currency merely by ceasing to coin new rupees for five years had brought our great Indian dominion to a state of barter. When Mr. Clinton Dawkins succeeded Sir James Westland he recog- nized the disease at once; a money famine had been created; the Indian government immediately reversed their policy and com- menced to purchase vast quantities of silver and to pour it through their mints. In 1900 the currency was expanded by over seventeen crores of rupees (171,479,318 rupees). Since that time the demand by India for rupees has been insatiable. As I have pointed out, the Indian government last year bought nearly two-thirds of the whole world's silver product and coined 227,670,000 new rupees, the mere seigniorage profit on which was $20,000,000. So that the Westland idea of 1893 of starving the Indian currency until a gold habit was acquired, until a gold standard and gold currency took the place of a silver standard and silver currency, this has given place now to far larger coinages of rupees with "closed mints" than were ever coined with open mints. But to-day the only man who can supply the mer- chant with the rupees he needs to buy wheat, cotton, rice, or tobacco is the secretary of state for India. The secretary of state for India is the silver king; he is the great rupee monopolist. Before the Indian mints were closed to free coinage in 1893 the merchant had this protection : He could buy silver from Colorado in the open mar- ket, send it to Bombay and have it minted into rupees, so that he was not at the mercy of the secretary of state for India; but to-day to buy the rupees he requires to pay for the products which he imports into Europe the merchant must go to the secretary of state, who sells him rupees at what price he likes. The price fixed by the government of India for a rupee to-day is 16 pence. Next year if they raise the rate to 18 pence or drop it to 14 pence the merchants operating in Indian produce will have to acquiesce or go out of busi- ness. At present the silver in the 16-penny rupee is worth just 10 pence gold, so that on any rupees coined to-day the Indian govern- ment has a profit of 60 per cent. The profit on seigniorage at pres- CURRKNCY LEGISLATION. 177 ent stands second only on the revenue list to that which the govern- ment receives from its land tax. It is a vicious and innnoral system, this of selling full legal tender currecy, the mone}^ of exchange, at a huge premium. Mr. Morley no doubt regards it with great misgiving. Mr. Weeks. What percentage is the seigniorage of the total Indian revenue ? Mr. Frewen. I should have to refer for that, but I think the total Indian revenue is about eighty millions sterling. India, through its secretary of state, Mr. John Morley, dominates the silver question. They have arrived at a system which cheapens silver bullion to just that point where their export trades in many staples can comj^ete most successfidly with yours. They have arrived at an exchange point which, as they think, gives them the largest seigniorage profit possible and yet permits their export trades to prosper. Is it not, therefore, time for your country to take a hand in the silver discussion? If you can through the Goschen plan get the price of silver bullion up to something like a dollar an ounce then your exports from this country will be stimulated at the expense of exports from India and China. That is an argument which, as I said before, does not appeal to us in England to quite the same extent. Our statesmen say, "Why connive at a change in exchanges which will enable the United States to export at India's expense wheat, cotton, jute, rice, timber, and other staples which at present reach us' from India, a part of our own Empire ; and why also by expandmg the exporting capacity of the United States, which is already pre- ponderant, place our gold market still more at her mercy?" Of this nature will be the objections to the Goschen plan in England; to a certain point they are valid objections, but I am convinced that the long-continued low rates of silver exchange have been undermining the industries of white workers everywhere. You may recall that before the election of 1896 your then Speaker, Thomas B. Reed, crystallized the exchange problem in a very happy phrase. He said, "I have come to see that the yellow man using the white money may cut the throat of the white man using the yellow money." Before concluding I wish to say that on one point where I was not at all clear a few years since I am quite convinced to-day. We reform- ers thought that the great rise of prices which we foresaw nuist follow from the new gold discoveries — that this would settle the silver ques- tion; but we ought to have foreseen that, far from settling the ques- tion, it must inevitably, after a short period of adjustment and excite- ment, recreate the disease and in a more virulent type, because as gold prices i;ise^and they are certain to rise much higher during the next ten years — so also w^ages and the whole cost of living in gold- standard communities must rise pari passu. Already here w-ages have largely adjusted themselves to the higher profits resulting from higher prices. But what of Asia? There there is not as yet even a faint symptom of a rise in silver prices. In Asia wages and the cost of living are just what they were thirty years ago. So that the rise of gold prices in Europe magnetizes every product which Asia can pile on shipboard to export. Asia, that is, gets more rupees or dollars or taels with each advance of gold prices in Europe, and because her wages and her prices show no tendency to advance she more and more holds the competing industries of white men by the throat. If silver prices in Asia remain fixed and immovable (and until the mints of 37381—08 12* 178 CURRENCY LECIISLATION India reopen they will^ in my humble judgment, remain fixed and immovable), the happy dictum of Speaker Reed must with each fresh rise of gold prices recur more and more to the minds of all those who to-day are anxious students of the great problem of silver. Nor is it only from Asia that competition, subsidized by the gold premium on silver currencies, is destined to increase. I was shooting two winters since in East Africa on the Victoria Nyanza. The cheap rupee of the government of India has already in only ten years covered a huge country there. It is beginning to be the center of attraction for countless native tribes from Abyssinia to the Kongo. As in Hindustan, so also in East Africa it is being hoarded on a great scale. On return- ing fi'om the great lakes I learned from the bank in Mombasa that they had imported from India over 9,000,000 rupees in five years. In a quarter of a century it is safe to predict that the rupee will rule all the exchanges of Africa from Egypt to the Zambesi. \Miether this new trade development helps us or hurts us will largely depend on the exchange value of the rupee. Such is the new phase of the silver question; your community will never consent to leave an issue of such magnitude where it is to-day at the mercy of the season's rains in Hindustan. As a palliative, then, as a mere makeshift to carry the world along for twenty years until it has found time through study to settle the problem on wise and wide lines — a problem which Vitally concerns all white men— I have ventured to submit for your consideration the Goschen plan. Mr. Hayes. I do not suppose you are aware that we have in this country, perhaps not in actual circulation, but in the banks, among the people, something like four hundred and sixty millions or four hundred and seventy millions of dollars of silver certificates secured by silver deposited in the Treasury, and mostly ones and twos. Mr. Frewex. I am aware of that, but you wall bear in mind that the radical distinction between Mr. Goschen's proposition and the legal status of your silver certificate is that the notes he proposes to issue will not be legal tender. Mr. Hayes. Ours are not either. Mr. Frewen. The silver dollars are; true, your silver certificates are not; but as long as the man who owns the silver certificate can demand a legal-tender dollar for it, to all practical purposes the silver certihcate is legal tender. But the only point I wanted to emphasize to the committee was that Mr. Goschen's proposition was to issue nothing but token money, and all economists are agreed that token money, the legal tender of which is limited to $10, has no effect upon prices. Mr. Hayes. Then you think it would be safe under the circum- stances, considering that we have five hundred millions of currency in the shape of silver certificates, that it would be safe for us to still add further to that stock by issuing such money as you suggest? P|Mr. Frewen. I think it would be perfectly safe. There is no insecurity whatever in issuing ])ocket money "which is strictly lim- ited in its legal tender to SIO. It would be merely for the conven- ience of the ))eople and it woidd have no effect on piices whatever, and through |)rices on the exchanges. This proposition, so far from being an inflation, is distinctly a contraction. Of course I can understand that your silver men may object to it on the ground that it is a measure to contract your currency. CURRENCY LEGISLATION. 179 ^Ir. Weeks. Air. P'rewen, at tlio last session of (.'ongre.ss we passed, in connection with other currency legislation, a bill which cut up our gold and silver certificates. There is a great demand for small bills in this country. A large proportion of the people in our country do not bank at ail owing to the remoteness of the banks, and I presume, in proportion to the population, a greater amount of money is carried in the pockets of the pe()})le than in other countries. To meet that demand we cut up our gold circulation into smaller bills. Since that time it is perfectly apparent to anyone that there are great num- bers of these bills in circulation which were not in circulation before. Basing the thought on your suggestions, that was bad legislation from our standpoint, because it put into the pockets of the people full legal tender money when they might just as well have used soir.ething in the place of it; in other words, we were doing exactly the opposite thing to that suggested bv Mr. Goschen in his speech of 1891. Air. Frewen. We thought in England that your legislation of last session was most unfortunate. Those big gold certificates should have been on deposit at the banks. If you have a certificate for a thousand gold dollars, that certificate will not be carried in the pockets of the people. It is credit money, but if you break it up into small notes it becomes mere pocket money. Mr. Weeks. I am inclined to think that is right. Mr. Gillespie. As to these notes that you speak of issuing, they would only be redeemable in silver, and not in gold. Mr. Frewen. Yes. Mr. Gillespie. And the legal tender limit would be $10? Mr. Frewen. Yes. iVIr. Hayes. They would have to be redeemable to the extent of $10 in gold in order to maintain their parity. Sli\ Frewen. They would be legal tender for $10, and in efi^ect no doubt thev are exchangeable by the holder for «old to that extent. Mr. Hayes. To that extent? Mr. Frewen. Yes; only they would not be secured by gold. Mr. Gillespie. If they are redeemable in gold, in case of a crisis there is always a run for gold everywhere, and would not these limited notes come in to the banks and would not the people every- wdiere demand gold? Mr. Frewen. I think not, because they are not money of deposit at all, but simply fractional pocket money — ^token money — such as we have in our country, the half crown or the shillino;. You will carry these notes for the purpose of shopping. I incline to think that the banks should not receive them on deposit at all. The banks in our country are not obliged to receive half crowns, but they do so to oblige their large customers. I think it would be a good tiling if the banks never received the proposed small notes; their refusal would keep them in circulation. Mr. James. You think it w^ould be impossible to gather up a suf- ficient number to make a run on the gold reserve? Mr. Frewen. Yes. Mr. Crawford. Do English consols circulate as money? Mr. Frewen. No. Mr. Crawford. The interest-bearing consols ? 180 CURRENCY lp:gislation. Mr. Frewen. Our consols do not circulate as money at all; they are not used as yours here as a basis for national bank currency. Mr. Prince (Acting Chairman). I want to read from the [national bank act regarding legal tender and lawful money (reads) : The following statement concerning the legal-tender properties of money of the United States is based upon United States Revised Statutes, sections 3585, 3586, 3587, 3588, 3589, and 3590, and the acts amendatory thereof and additional thereto: "Gold coin, standard silver dollars, subsidiary silver, minor coins, United States notes, and Treasury notes of 1890 have the legal tender quality as follows: Gold coin is legal tender for its nominal value when not below the limit of tolerance in weight; when below that lin^it it is legal tender in proportion to its weight; standard silver dollars and Treasury notes of 1890 are legal tender for all debts, public and private, except where otherwise expressly stipulated in the contract; subsidiary silver is legal tender to the extent of ten dollars, minor coins to the extent of twenty-five cents, and United States notes for all debts, public and private, except duties on imports ATk\ interest on the public debt." Perhaps joii have not seen the February statement of the Treasury Department, have you? Mr. Frewen. No. Mr. Prince. The clerk will show you that, and after you have been kind enough to look at it, will you please answer this question: By that statement of February 1, 1908, you will see that we had on that date 562,849,982 standard silver dollars, wliich are full legal tender. Now, casting your eye over that statement you will find that the total amount of money and currenc}^ that we have in circulation, or in the general stock of money in the United States, is $3,380,452,108. The estimated population is 86,903,000 and the circulation per capita is $35.61. All of that money that I have enumerated, $3,000,000,000 and over, is on a parity with gold, of which there is less than one-half which is gold; in other words, $1,638,000,000. Now, if you had in circulation what is called the "Goschen note" — and under our law all classes of money and currency must be maintained at a parity with gold^are you not endangering the gold basis? Mr. Hayes. Yes; and wouldn't it result in exporting gold in a short time? Mr. Frewen. Oh, no; what expels gold is the movement of your exchanges. If you inflate your currency you raise your prices, increase your imports, and your gold leaves to pay for increased imports. But pocket money — the small fractional money — has no effect on prices. It is the credit money that raises prices and influ- ences the exchanges. The whole position is this: If the Goschen notes were unlimited legal tender, I should at once say, of course, they might expel gold. If you make an issue of full legal-tender money to that extent — and I use the word inflate scientifically^you "inflate" your circulation, to however small a degree. If you inflate your circulation you raise your home prices, and if yoii raise prices here you increase iniports, and if you increase your imports you throw the balance of trade to that extent against the country and drive gold out. That is the only way in which you can expel Mr. Prince. Your idea is that these notes being in small denom- inations, and being scattered throughout the country and held only in the pockets of the people, it would be next to impossible to gather them together in such (piantities as to present them in sums of $10. Mr. Frewen. You could not present them legally — legally they are a demand for fractional silver only. CURRENCY LEGISLATION. 181 Mr. Prince. That is, they are legal tender up to $10, so that if you o;athered enough of them together to make $10 you could then ask tor gold 'i Mr. Frewen. You could only ask a bank for the $10 once; you could not present another and get the gold. You could not hand in a million of them and receive a million dollars. Mr. Gillespie. One man could go to the bank ten different times a day, could he not? Mr. Frewen. But that would be a small matter. Mr. GiiXESPiE. Supposing there should be a hundred men doing the same thing? Mr. Frewen. That is still a small matter and would not make a run on the bank. In short, these silver notes, even to $10, are not a demand for gold, but only for fractional silver. Mr. Prince. We have had the operation of an endless chain in this country, and as the result of that endless chain there was a drawing out of gold, and we had to issue about $260,000,000 bonds to maintain that chain. We have only 7,000 individual banks. It might be that this is only a notion in one's head, but still- Mr. Frewen. You can not be too careful; I agree with you there. Mr. Prince. It might cause some disturbance. lias 3^our attention been called to any of the pending bills in the House for consideration? For instance, has your attention been called to what is known as the new "Fowler bill," the one that the committee now has under consideration? Mr. Frewen. No, Mr. Chairman; it has not. Mr. Prince. Has your attention been called to the bill that is being discussed in another body, and which has been printed in the newspapers and is known as the "Aldrich bill?" Mr. Frewen. I have read Senator Aldrich's speech, so I am gen- erally conversant with its conditions. Mr. Weeks. Do you think the silver notes suggested in the Goschen plan would have any other advantage over a properly issued credit currency note than the stimulation of silver mining? Mr. Frewen. Yes; that is the point I tried to make. The all- important point is the rise in the exchange rates with the Orient. This is the only pcnnt interesting me in connection with what is called the silver question. Whenever the bullion price of silver falls you stimulate all that which is export. Anything that will give employment to silver and thus keep it at a higher rate will enable you to compete on much better terms with what Asia exports to Europe. Mr. Weeks. Suppose China should go to a gold basis? Mr. Frewen. Well, look at the position of India with a gold standard. We shall never get a gold currency into India or China. There is all the diflerence in the world between a gold standard and a gold currency: but to some extent the fact that the rate of exchange is being held artificially that coin, which ought to have a bullion value of twenty-one to the pound, is being held artificially at fifteen to the pound — that does to some extent cripple India's power to export, but to a limited extent. The exchange rate for the rupee is fifteen to the pound. I would like to see it at thirteen to the pound; at that exchange silver is cheap enough. Have you got a reply to your question? The point of great importance to 1113' mind 182 CURRENCY LEGISLATION. is, that if YOU can safely do something on the Goschen Hnes then the rate of exchange will go up ; in other words, the bullion price of silver will go up, which will increase your exports immensely to Asia. That is why I should like to see the Goschen plan adopted here and in England. Mr. Chairman, I know that notwithstanding the difficulties I haYe pointed out — the fact that the goYernment of India makes four millions sterling of profit on seigniorage, and the fact that India is our ward and w^e are therefore tender about their export advantages- yet we had so hard a time last w^inter after your crisis, the banks raising rates to 7 per cent, that we are in the mood to consider some careful measure of reform. I believe such a measure as Mr. Goschen's would carry the city of London with it, and that it would satisfy the chancellor of the exchecpier. If you had a commission liere, and would send over a subcommittee such as the Wolcott Com- mission, which had satisfied itself that this solution of the currency question — the Goschen solution — is sound, I believe the two countries would adopt it. I think it likely also that Germany would adopt it. Mr. Weeks. Do you think it w^ould be w^ise from every view point on the part of this Government to try to open up negotiations with your country along the lines of the Wolcott Commission? Mr. Frewex. I think that if you appointed an expert commission, not on the lines of the Wolcott projjosal — that day is gone — I have here the rei)ly of the government of India to the Wolcott proposals — but if YOU would make the point that America now recognizes that the government of India is able to buy and coin two-thirds of all the silver mined in the world for the Indian currency, that so great an addition to the Indian currency has not afTected India's prices at all; that is, prices in India have not risen at all — that Africa is commenc- ing to absorb large quantities of silver — if you take that line and say, "It encourages us to believe that the settlement of the silver question is not after all a very large one." it seems to me that we coidd join you and Germany in issuing these proposed small notes in order to get in those three countries large central gold reserves. I believe along those lines a safe settlement of the currency question can be greatly advanced. Mt. "Weeks. When settling the currency question along those lines, w^ould it materially afl'ect the currency conditions throughout the world ? Mr. Frewen. Oh, yes; it would immensely. It would raise the rates of exchange against the whole of Asia. Mr. McKixxEY. As I understand you, the silver notes issued along the lines of the Goschen proposal would be redeemable at our Treasury in silver? Mr. Frewen. Yes, sir. Mr. McKiNNEY. Taking into account the fact that we have issued silver certificates for nearly all of the silver that we have in the Treas- ury, in order to provide for the redemption of these new notes, would not our (lovernment have to go to work and buy silver again, and would not that tend to disturlj our present standard? Mr. Frewen. Not the least, as long as the notes issued are of limited legal tender. The notes could not expel a dollar of gold from this country under any conceivable circumstances. On the contrary, CURRENCY LEGISLATION. 183 but indirectly, they woiiUl bring you much gold tlir<3Ugh the increase of your export trades wliich they would bring about. Mr. Weeks. What would be your opinion as to the effect if you did not make them legal tender in any amount? Mr. Frewen. Well, you must make them legal tender to a limited amount. Pocket money is pocket money, and token money is token money. There is no token money in the world that is not legal tender. If you did not make them legal tender, would anyone receive them, say, at your post-oflices? The Wolcott proposition was tliat we should increase the tender of our silver money — increase it from £2 to £5 — but 1 do not think there is any particular point in it; it is not worth urging. I think that $10 is as good a limit as $2.5. Mr. Gillespie. Do you think that this $50(),0()(),000 could gt) out among the people and have no particular effect on prices? Mr. Frewen. In the first place, this fiv^e hundred millions of fractional currency takes the place of full legal-tender gold notes. You are going to contract your ciuTency to the extent of $500,000,000. The result should be some slight fall of prices. Mr. Gillespie. Then the available supply of full legal-tender money would be increased $500,000,000. Mr. Hayes. His, idea would be to pile up the $500,000,000 in the Treasury. Mr. Frewen. You would have $500,000,000 of gold in a reserve for the purpose of meeting a crisis; it is to be locked up. Mr. Prince. In other words, it is currency substitution and not currency inflation. Mr. Frewen. It is contraction and not inflation, '^'ou would be contracting the full legal-tender money current and you would put in its place nonlegal-tender money, which has no effect on prices. Mr. Gillespie. If it became necessary to turn the legal-tender money loose again in the country, that would have an eft'ect on prices? Mr. Frewen. That would be to return in a crisis the five hundred millions by which you contracted your currency. Mr. Gillespie. Suppose we wanted to prepare for war and had to use this $500,000,000— put it in circulation. We would have to provide the legal-tender gold and the small notes, would we not? Mr. Frewen. The small notes would at no time and under no circumstances have any eft'ect on prices; vou would be incurring no risk. Suppose that you had accumulated this $500,000,000 that I have been talking of, and it had been in vour Treasurv last October — suppose that Mr. Cortelyou had had $500,000,000 ot^'free gold at his disposal. Would not the situation at that time have been imme- diately relieved ? (Adjourned at 12 o'clock noon.) lIEAliING ON THE FOWLEK BILL. Committee ox Banking and Currency, House of Representatives, Wednesday, February 19, 1908. The committee met at 11 o'clock a. m., Hon. Charles N. Fowler (chairman) presiding. STATEMENT OF HON. LYMAN J. GAGE, EX-SECRETARY OF THE UNITED STATES TREASURY. The Chairman. I present to you ex-Secretary Gage, who has come here upon in^dtation to address us relative to proposed legislation and who will proceed to make liis statement, and after he has finished he will be very glad to answer any questions that' the gentlemen of the committee want to ask him. Mr. Gage. Mr. Chairman and gentlemen, I do not know but I ought to apologize to you for coming and thus intruding upon your time. I tlunk perhaj^s I ought to apologize to myself, for I was free from trouble and cares of all kind, with no responsibilities resting upon me, and here I now am mixed up in something that only con- cerns me from a general patriotic point of view. It only concerns me, as I say, as a citizen, and as a man who loves liis country. We have reached what I tliink is the most important period in our history for forty or fifty years, and that is the determination of the question, the solution of wliich depends very largely upon the body of men composing this committee. So I think if there is any- thing that I can contribute, either to show you by my ignorance what you ought not to do, or by my experience and correct reflections, if they are such, what will help j^ou see what you ought to do, then in that case I believe it to be my dutv, not my pleasure, although there always is a degree of pleasure in performing one's duty, to accept the invitation of the chairman to come here and speak the truth as I see it. I ciuestion how I ought to proceed in what I have to say. All of you know, if you know about me at all, that I am not a trained speaker, and I have been at a loss how to proceed in presenting the ideas that I have in mind. The lihilosoph}' of finance, the metaphysics of currency, I have only studied in a way. The convictions that I have reached are the result of certain experiences in my life, the observations which I have made, and the reflections which were the natural results of that experience and observation. These have to a degree been con- firmed by such reading as I have been able to indulge in, of the works of those who are wiser and understand more thoroughly the principles and ])hil()S()])hy of the subject in question, and so I have concluded, at the risk of a))pearing to be very simple, if you will 184 CURRENCY lp:gislath>x. 185 indulge nie, to take you as briefly as 1 can (jver the road of obser- vation and experience and reflection which I have come, that you may judge thereby of the merit that attaches to what 1 may say. I see two gentlemen here at least who will, quite likely, follow me, if I give them time, who will speak of the matter from higher stand- points of what I would call the philosophy or the metaphysics of money, finance, and banking. So if you will let me follow my simple road, it may sound a little personal, but 1 can not help that In 1854, a lad of 18, it was my very good fortune, as I regarded it then and as I reoard it now, to become emphn'cd in a little l)ank as a junior clerk m the State of New York, in a small town near the center of the State. The bank had S50,000 cajntal. It had about $75,000 in deposits, and it had a right under the law to issue S50,000 in notes. I observed that the business of the bank was to guard its deposits with proper reserves in money, to protect its deposit line, and to guard its outstanding notes with a proper reserve to protect them when presented for redemption. There were two places of redemption for the notes. One was in the town where the notes were issued, the bank's counter; the other was in the city of New York. I observed shortly that the l)ank was exceedingly cautious about the use that was to be made of the credit that the bank gave out to its customers in exchange for the obligations that it took from its customers. As I say, like all banks, it was restrained in its operations by the limitation of its reserve money, and when the relation of tilings was about normal or satisfactory, it could not loan, if thereby it should be obliged to take its reserve money and hand it to a customer in exchange for his obligations, for that was giving cash in exchange for credit. I found it was the business of the Ijaiik so far as possible to give credit in exchange for credit, and the credit made by tlie ])ank to the person who gave it liis obligation being put upon its books was likely to be transferred from one to another tlu'ough the instrumen- tality of checks, and so not peril or prejudice by exhaustion the cash resources. Such credits therefore w^ere fairly given. But the same rule applied to the issue of its notes. A borrower came to the ])ank and wished to make a loan. He could not avail himself of the result of the credit if placed on the bank's book and availed of by his checks, which would be transfer- able in the field of circulation which limited the Ixmk's business hor- izon. In such a case circulating notes or currency could be perhaps utilized for the borrower's purpose, and perhaps to the advantage of the bank, and the question always arose, "What do you want to do with the proceeds of this credit?" If the man wanted to borrow and buy securities with the money, if he wanted to borrow and pay a note in the next town, the bank ^\■ould not issue to him its notes; it would not give him credit upon its books. In short, it would not exchange its credit for his, l>ecause it was easily seen that through the instru- mentalities which he would use, whether by his checks or by the notes which they would give him, he would attack and de])lete by so nuich the cash reserve which supported and protected the whole line of liabihty. The notes would attack the reserve situation by going strictly to the redemption agent in New York and there l)e redeemed. His check would exhaust the reserve by being collected in the next town where he save his check in payment for his notes. 186 CURRENCY LEGISLATION. But if it appeared, as in very many cases it did appear, that man wanted currency for some of the commercial or industrial uses of life, like the payment of employees, like going up into the ''north woods," as we called it then, to pay men for getting timber and doing a logging business, or going into Indiana to buy wheat, or into Wis- consin for that same purpose, or into Ohio for the purchase of wool, and all those miscellaneous purposes which go to make up the prod- ucts of industry, and start them forward to market, then by the power that the bank had to issue its unissued notes, which might still lie unused, the bank was glad to make that transaction, and the money (bank notes) was available to the man if his credit was good so that the bank was willmg to take the risk. But so jealous was the bank as to the use of these notes that it was my duty, as a junior clerk and general all-round assistant, to take the bank's notes which were brought out from the vault, preparatory to giving them to the borrower, and take a small stamp which made the letter E or X or Y, no matter which, and stamp every note and then make a memoran- dum upon a book kept for that purpose of the date and the amount of the issues and how marked, and as those notes came in for redemp- tion to watch the average time of circulation which they would enjo}'. I did not perceive the relation of things so very clearly at that time, because I was young and did not reflect so very much. Then I went to Chicago a year and a half later, and after two or three years of knocking about I again found myself in a bank operating under a State charter, clothed with the powers of a trust company and savings company, but with no power to issue notes. I found the situation there something like this: A great variety of banks and a great variety of currency; there were notes in circulation issued by certain banks specially chartered by certain States, doing business and issuing notes. There was the State of Illinois banking system, which was called a system of free banking; that is to say, any five persons, I think it was five, could associate together, start a bank, notify the auditor, put up some State bonds of any of the sovereign States of the United States, and have issued to it currency notes, strictly in accordance with the formality that exists regarding the national-bank notes at the present time. These banks so chartered and organized were required to redeem their notes at their counter and not elsewhere, and, with a very wise or discriminating regard to the responsibilities of redemption by the organizers of the banks, the places chosen for the organization and location of these banks were generally so obscure that nobody would dare go across the coimtry with the notes to get them redeemed. And 1 believe this actually resulted in the course of that business, to wit: A group of men ])utting together $1(X),()00 would organize a bank; they would buy the bonds and deposit them with the audi- tor of the State, draw out the money or notes — they were not in the business of lending much money, the places where these banks were situated didn't have much business to do generally — and they would take the notes and go to the various markets, like Chicago or else- where, and buy coiuinodities, wheat, corn, flour, ship it to New York, turn it into the money of the country, take the ])roceeds, buy in the market more bonds and start a new bank by putting u]) the bonds, get some new currency, and do the same thing over again; so that with a capital of .fsl ()(),(J00 a man or party of men could have about six CURRENCY LKCilSLATlON. 187 or more banks and be cb'awing interest on $()()(), 000 or more bonds. Ihit they were brou<2;ht forth as a bank note, secured by the sov- ereit^n bonds of a State, and people took the money, and those taking it passed it off on somebody else. No one would (^o to present it for redemption at the place it was issued. I remember an incident touching; upon that ])articular ])()int. The institution to which 1 was rehited, havin*:: no note issue and being inimical to this principle of currency, organized a raid u])()n these various banking institutions, so-called, that is to say, it sorted their notes and by special messengers sent the notes home for redemption in gold. I remember specially being very diligently occupied for some days in sorting out tlie notes for a particular bank imtil we had accumulated some S25,000 or $30,000 of the issue of the bank of Kushville, I believe it was, and three men, with about $30,000 of that money, started for the bank to get these notes redeemed in gold, or bust the bank. They were gone about ten days. Anxiety sprang u]) in the minds of the officers of my institution as to what had become of these men and the money — particularly as to the money. At the end of about ten da3^s the men returned with the notes they had taken away and explained that they had taken the pre- scribed route; they had gone by rail to a certain place, and had taken a stage and had gone to a certain other place; that from thence there was no stage line over to the other place where the bank was, and so they had hired a private vehicle to take them over there, but they were strangers and were under suspicion, and somebody smelled out the object of their visit and they were informed by a committee of men that if the^^ came down there "to l)reak their bank" they had better start back, because neither they nor their money was safe on any such kind of an errand as that, and so they prudently returned. I found then that a bank note, even if secured by the bonds of a sovereign State, was not naturally a virtuous cur- rency, nor was it naturally responsive to any of the requirements of business at all, but it was issued and it operated upon considerations entirely distinct and separate. Now I found that there was another institution, or rather indi- vicUial who ran a bank, and his name was George Smith. He came from Scotland, and I presume had a training in the Scotch system of banking. He was a "canny" man, as the Scotch are, careful, judi- cious, conservative, and wise. He had a limited amount of money, probably $100,000. He found himself in a community rapidly developing, for the comparatively little city of Chicago was the center where the market roads from the country naturally focalized and the products of the count r}' were coming in to be sohl and exchanged preparator}" to being shipped ]\v the water routes to the east. He round also that there was a considerable activity in the way of build- ing around the cit}^; it had its little factories, and its warehouses, and its dwelling houses, and so forth. He found an absolute poverty in the means of circulation. Some gold had been brought into the country and circulated, and some of those notes I have been speaking of were circulated, but it was as expensive to the banks to get these notes as was gold itself; that is to say, they had to give value to get them equivalent to what they would have to get the gold, only they could get them easier. 188 CURRENCY LEGISLATION. George Smith conceived the idea that as his credit was estabhshed, as he understood the business of banking, he could serve the com- munity usefully and with profit to himself, the last probably being his chief motive — a motive that animates most men. He had no power under the law to issue notes. But there are ways around a law oftentimes, as we have found in our experience. So he bought the charter of a bank in Georgia, called the bank of Atlanta, which had a right to issue notes. It had no capital; it was inert and sub- stantially dead. He bought that charter, organized the bank, and issued to George Smith from time to time, the notes of the bank in exchange for his obligations, I presume — I never knew the real inwardness of it — and across the back of these notes he stamped these words: ''Redeemable in gold coin at the oftice of George Smith in the city of Chicago." So he acquired all of these notes, which cost him nothing except his credit with the Bank of Atlanta. These notes he loaned to the public to the amount of something like, at one time, from the best advice that I can get, $1,500,000. Those notes were the most popular and held the highest degree of confidence in the minds of the people of any currency extant and passed current in that district of the country tributary to the city of Oiicago. He continued this business for a number of years, then the shadows of the civil war grew black and ominous, and, canny Scotchman, as I said he was, he smelled danger from afar, he liquidated his bank, he redeemed all of his notes, he paid all of his depositors, and he went home to Scotland to enjoy the fortune that he had either well or illy earned by ministering to the industries and commerce of a great State. That was a lesson to me in contrast to the other lesson in a State bank secured circulation. I saw a credit currency issue, with proper assets behind it, containing only the elements of credit, was an effect- ive, useful, and economical agency in the industrial exchanges of the people. There was another instance near by that enforced upon me the same proposition. That was the Bank of the State of Indiana. The Bank of the State of Indiana was in existence in those times; Hugh McCullough was president of it. It was chartered by the State; it had eighteen branches, and at all those branches it did business, the central office being only the administering bureau for all. It had a right to issue notes, without putting up any of the bonds of anybod^^, to the amount of twice its capital stock. It did business and performed for many years in the most safe manner the functions of banking in the State of Indiana to its great advantage. It was never able to put out conservatively and safely more than half of the limit of circulation that the law gave it, and the Bank of the State of Indiana notes were recognized in the New York market. The notes issued under the secured system of the State of Illinois were tabooed, except in the brokers' offices, at a discount, in the city of New York and all commercial centers. I became acquainted with the fact that the State of Louisiana had a system somewhat similar to the bank of the State of Indiana; that is to say, tliey had a credit note system issue, rec(iiiring the hanks to hold against the note issue 33^ per cent, I believe, in specie and two- thirds in good commercial bills, not stocks or bonds, and for many years that bank performed its function. But those banks mider the Louisiana system were finally taxed out by the desire of the Govern- CURRENCY LEGISLATION. 189 iiient "to t^et revenue," if that was the real desire of the Government, and retired — that is to say redeemed — all their notes, organized under the national law, and continued their operations as banks in a manner much less efl'ective to the general community than they had performed it before Congress tied up their capital by compulsory investment in securities, viz, United States bonds, to become hypothecated 1,000 miles from home. The banks of the States of Missouri, Iowa, and Ohio were similar to the Bank of the State of Indiana. It was a credit currency system. As a clerk in this bank in Chicago, as time went on, it was my duty to sort the money, to keep the best, pay out the poorest. That is human nature, too. The money we saved was the money of the Bank of the State of Indiana in our tills, the Bank of the State of Ohio, and of Iowa, and New England money, so far as we desired to have a reserve of currency. We were on a specie basis at that time nominally, but there was very little gold in the reserves of the banks. As I said a few moments ago, in the beginning the pubhc, especially the State of Illinois, thought it had the model system of notes secured by bonds of the sovereign States; but a change came over the situa- tion. State bonds began to depreciate in value in the market. The banks that I have described in the State of Illinois secured by these bonds, one after the other, unable to find gold for exchange for its notes on the first presentation of any volume of these notes, straight- way suspended payment. Under the law the banks were closed out and the auditor sold the securities for the benefit of the note holders. These notes were in considerable volume and passed through the hands of our bank, and day after day we sorted these notes with reference to a schedule which showed the value of the securities of each bank; w'e sorted out and kept those that we considered the best and those that were the poorest we paid out. And that was human nature, anybody would have done it. The net realization to the note holders under that system of the State of Ilhnois as a result of liquidation was somewhere between 40 and 50 cents on the dollar. The loss to the note holders under the George Smith method and the Louisiana system, the Bank of the State of Indiana, and Iowa, and Missouri and Ohio was nothing. And so it came to be borne in on me that what is called a credit currency, which enabled a bank to give its credit in exchange for the acceptable credit of its customers, properly guarded and protected, and based upon sound banking, with honesty and integrity upon the part of the administrators of the credit, was the truest, best, most adequate, and practical system of banking and currency as compared with any other. Now, 1 think I am through with the sketch I haA^e indulged in. I indulged in it simply for the side lights which it may furnish to the consideration that you have got to give to the great questions of bankino; and currency, which it is your special duty to consider and determine. Now, afterwards the Government wiped out all these banks of issue, good, bad, and indifferent, b}- taxing them out of existence and introducing the national currenc}' s^-stem which is now in vogue. So charged was I by the influences of these things I have been speak- ing about — to wit, the principle of credit currency — that, as a national banker, when I came mto the position of control or substantia] con- trol of a large institution I would not issue notes under the national- bank act. The reason wIia^ I would not do so was that I would not 190 CURRENCY LEGISLATION. secure part of my liabilities in the form of notes by especial pledge of the property of the bank to the prejudice of those whom 1 owed on book account. The profit on circulation was not so very tempt- ing. If it had been, perhaps I would have fallen like most all my friends did. Now we have got the system as it is. Is it an effective system? Does it meet the needs of the country? Is it responsive to practical needs, and is it in accordance with the true scientific principles which ought to govern banking and banldng functions? They say every- thing is relative, and a comparison is the best way to show" a fact. Therefore I will venture to refer to the historical operations of a great bank in another country — the Bank of France — and ask you to look at its liistory and our own. The Bank of France was established about the year 1803, I believe. It has the power substantially unlimited of note issue. Its credit notes in circulation have always been four or five or six or eight times its liabilities on its books. Its notes always circidate as money in the community. It continued undisturbed through the revolution of 1830 of Louis Napoleon, which disturbed the political condition of France to its center; it went on undisturbed in its operations and performed its functions, viz, to give its obligations in exchange for the obligations of those engaged in commercial and industrial pur- suits, uninterrupted by the coup d'etat by w^hich Napoleon III made himself Emperor, it came into the period of 1870 and 1871 when it saw its countr}^ devastated — nearly ruined. France was at the close of an exhaustive and futile war, its enemy was in possession of its capital, the country was under duress to pay a thousand million of dollars of war indemnity. It witnessed the rise of the '"commune" with its regime pf bloodshed, murder — of course all* industries suf- fered — commerce was afflicted, and misery fell upon many people, especially in the besieged cities, but the bank continued its functions uninterrupted, without any panic. It did suspend specie payments on its notes, out of prudent considerations, to control or to a degree put a limit upon the foreign export of gold, but at no time during this period of which I have been speaking did gold in France or on the Bourse at Paris, command a premium so high, measured in the notes of the Bank of France, as ordinary paper currency commanded in this country at the close of the most prosperous years the country ever knew. These things are painful contrasts, and the}^ need to be inquired into. Is the national system of currency" and banking as now operat- ing an effective system ? It is not inviting to the public at large, for not more than half of the banking institutions and those who desire to engage in that business have embraced the provisions of the national banking act. We have 6,500 national ])anks organized over the country. They are each inde])en(lent institutions, with no natural power of attraction toward each other by any law of self-interest. On tlie contrary, as quick as a crisis comes they become charged with the influence of a mutual repulsion, and. each one by the instinct of self- preservation, or a narrow self-interest, begins to pull out of the com- munity the elements of strength for itself. They refuse, as is demon- strated completely without any illustration — they suddenl}^ refuse to perform the functions of a bank, which is to give credit in exchange for the credit of the community. They will no longer extend their credit. CURRENCY LEGISLATION. 191 On the ooiitrnry, they insist Uj^on the li(|ui(lation of cr(Mlits due to them from the piibhc, and the ruinous loss to the in(histrial olasses — those who produce from the soil, those who work in the factoiies and those who are employed in common labor — can not be measured by any rule that I know of. We only know it is enormous and that the losses and adverse consequences which are so plain will for some time be continued. Now% is there not need for thorough revision ? Do we not want to put the banking and currency system upon the basis where, if you please, the creator of it will be willing to trust it for a day or two? This system, created by the Ciovernment, supervised l)y the Govern- ment, in existence for forty-four years, with plenty of opportunity to observe its weaknesses and to strengthen it at points where it was weak, has been held out virtually by the Government to the people as entirely worthy of respect and confidence'; and the people, to the extent of four thousand five hundred millions of dollars, as evinced by the debts of the national banks, have taken this representation, or this implied representation, as valid and have intrusted their inter- ests to that extent to these institutions. Has the Government set the example of trust and confidence in these institutions it created? No. That is patent, manifest, and notorious — never to the extent of one dollar; it wdll not even take a certified check on the best of its crea- tures in paj'ment for a revenue of $100 coming to it from the most responsible citizen. I think the system ought to be revised from the beginning — that is to say, in all the important elements that consti- tute its foundation I shall get along in a few minutes — ■ — The'CHAiRMAx. Do not mind the time. Mr. Gage. I shall get along to a point where it will appear, and I may as w^ell anticipate it now, that I am opposed to the measure originating in the Senate, which is offered as a curative of the evils and weaknesses that inhere in the system. It will appear further that I regard the bill before you, known as the "Fowler bill," as a very comprehensive measure, containing in itself evidence that the author understands clearly and explicitly the principles which underlie the banking and currency relations of the United ^States, and has brought forth a measure which in contrast to the one offered in the Senate does reach to the fundamentals. We know tluit something fundamental is necessary — something w^iich will make the national banking system (if we want to keep it going) substantially uniform and more efTective in its application to the country's needs; but before any measure that reaches fundamentally to a fine foundation can be inaugurated and adop.ted some difhculties and. embarrassments must be gotten out of the way, and these embarrassments lie, in mv opinion, in the relation of the Government itself to the business o^ the community as represented in the banking system. This bill, if I may anticipate what I may say later, especially pro- vides that, and by an easy method, without expense to the people, cuts out as far as possible these artificialities which hinder and obstruct any possible uniform national system of banking and cur- rency. \Miat are those artificiahties? The artificialities that I speak of not only impair the general structure of banking and cur- rency, but they also embarrass or are likely to embarrass the Gov- ernment itself. They were born in the civil war. Of what do they 192 CURRENCY LEGISLATION. consist? First, the legal-tender note — the greenback. If it were necessary to issue them in the beginning, they should long ago have been retired. They were false to the economic requirements of a true currency. Legally equal to gold as a cash reserve for banks, we witness the anomaly of a debt obligation issued by the Govern- ment made the legal basis for debt obligations issued by banks to an amount four times as great. They thus weaken the foundation of metallic mone}', on which the fabric of our whole credit sj^stem must finally rest. It is perceived that noninterest notes payable on demand are an immediate economy over time obligations charged with interest, and this benefit the people refuse to surrender. And of course we know that there is a sentiment attaching to the green- back — and the sentiment is a high sentiment, it is a good sentiment, it is a beautiful sentiment — but sentiment and business are not fellow-travelers. They go on difl^erent platforms. Not that business should fall below honorable and true sentiment at all, but justice and truth ai'e the true basis of business- — not poetry or philanthropy. Now- observe our system of bank notes. It is a device that we brought in at a time of distress to create an artificial market for United States bonds. Their issue, volume, and use bear no relation to the true law which should govern in the field where paper money performs its proper functions. Now, the result is seen in two directions. In the first place, it has artificialized the price of Government bonds to an extent of at least 20 per cent, measured by the world's standard of value, as found in a free and open market where similar securities are bought and sold. As an incident to this artificialization the Government has become the guarantor of payment for some seven hundred millions of notes issued by more than 6,500 so-called national banks. This is a false relation in my opinion. It ought not to exist any more than the Government should guarantee insurance policies or the notes of cus- tomers that a bank has taken. Further, by the drift of events, and through political pressure, there has been injected into the channels of our circulation some six hundred millions of silver now possessed of its natural commer- cial value, measured by gold, of about three hundred millions, but maintained at parity with gold through the Government's pledge to maintain such a parity balance. Looked at from the Govern- ment's side we have here a direct or contingent liability consisting of United States notes, $346,000,000 silver currency, parity $300,- 000,000, national bank notes, $700,000,000. Of course this liability is not menacing or embarrassing to the Government at the present moment of time, and is not likely to become so, proA^ided we can continuously avert foreign or domestic wars, and provided, further, that the channels of trade where money circulates, can be to a large degree monopolized by the greenbacks and by silver, or silver cer- tificates. In such a case the Government may not at any early period experience any particular embarrassment, but consideration ought to be had to this, viz, we recognize that a strong metallic chest and an unimpeachable credit in the Government is as essential to success in war as is our Army and Navy. To the support of the Army and Navy, with but little grumbling, we contribute substantially a hundred million dollars a year for each, but for the economizing of a few millions we fail or refuse to put CURRENCY LEGISLATIOK. 1'J3 ourselves in the strong position of financial defense from a Govern- ment point of view and drift along in a position which it must be confessed is, and everywhere else in the world is, charged as being a weak and inexcusable position. It is, however, to the reflex effect upon our general banking and currency system that I especially direct your thought. I have said that the path to a more perfect condition in banking and currency is blocked by the artificialities developed by our financial legislation. Now, there would be no proper cause for complaint about it being blocked if as in the minds of many people it is conceived to be — that the business of banking goes on by the grace of the privilege granted by the Government to certain favorite persons, who exercise the function of banker to exploit the people. If that were the case, the more obstacles, restrictions, and repression the better. "\Mien a cor- rect understanding takes the place of these misa])prehensions, then it will be perceived that what hinders, restricts, or prevents the just, economic exercise of the banking functions interferes to embarrass an agency which, next below production and transportation in importance, is a minister to that industrial life wherein our material prosperity must be found. Now, in every other relationship existing between men, we know that there are natural laws which spring up by virtue of that relationship. They have to be discovered and recognized, and if obeyed they brmg in peace and happmess. It is just as true that in the field of economics and m the field of banking and currency and m finance generally there is a law of relationship which, if observed, will bring in the highest utility and usefulness and prosperity, but which, if violated, as in the law of personal relation- ships- between men, brings in disharmony, confusion, and ultimate disaster. Now, our histor}^ for the last forty 3'ears suggests — in fact, it demon- strates in the most emphatic way— that our banking and currency system has at some point at least been out of harmony witli the true laws which should govern it. I am speaking too long upon that subject. The Chairman. No; it is the sense of this committee that you proceed until you finish. Mr. Gage. Now, the national banking act has operated, in my opinion, to create an extraordinary innovation in bank credits, to induce the banking function to depart very widely from its natural use, which is to minister in tlie field of industry, production, and exchange, and has built up an enormous fabric of bank credits, represented on the books of the banks chiefly in large cities, an artificiality, and on this great artificiality of banking now rests the immense burden of securities, fixed in form, payable at remote Seriods of time, that have no relationship whatever directly to pro- uctive industry or exchange. How does it do this? I think it is plain. Tlie bank notes are issued to a bank. It gets them into the field of circulation in any way it can, and there is taken out of the field of circulation reserve money in its place, and this reserve money goes into the vaults of tlie bank and furnishes a basis on which is built up an artificial structure devoted to stocks, bonds, and securities, to which I have just referred. You know that a bank can carry credit in tlie centers, the reserve cities; it can carr}^ liabilities to four times the amount of its reserve :!7S81— 08 1:]* 194 CURRENCY LEGISLATION. money, and you know, I think, without my describing it too minutely, that deposits and loans are almost corollaries of each other to a large extent; that is, a credit made on the books of a bank in the field where bank credit circulates b}^ checks and drafts can be swelled up in volume with reserve money one-quarter as large, because that credit, so called, will be circulated from one to the other in the field of operation to which the credit relates — and now I am speaking broadly about the field of bonds, securities, and stocks, and that sort of thing. There is no difference in the power of currency to inflate credit. There is no dift'erence in the power between notes secured by bonds and notes not secured, except the assets of the bank. They are the same in their nature. Not only have the notes thus issued by the Government been used to take reserve money out from the field of circulation — I mean the active field where people pass money to and fro — but they have been taken over bodily to a large extent by banking institutions that are not under the national law and counted by them as though they were legal reserve money. There is nothing to hinder them from doing it, and the}' argue in a manner to justify this. They say these notes issued by the banks are better than greenbacks. They are secured by obligations that draw interest anyhow, and the green- backs are not. They are secured by the assets of the bank in addi- tion. The greenback is not. They are secured by the Government guaranty of payment and by a 5 per cent redemption fimd held by the Government, and so directly, not indirectly, but directly, by counting these notes as legal money, the State institutions take them and use them and inflate book credit, and we entertain the delusion that is very popular that we are a very rich people because the people have got thirteen thousand millions of money in the banks. I'hat is folly. They have thirteen thousand millions of credit there, and against those credits the banks hold against the people obligations that they can compel them to pay for about thirteen thousand mil- lions, and when all these debts are settled the whole business dis- appears. So we have not got thirteen thousand millions of money in the banks. If what I have so far stated has been a fair and true explanation as to the situation, what are you going to do about it? Let it drift? We have drifted over the rocks several times. We drifted over them in 1873 and struck the rocks pretty hard. We drifted over them in 1890 and got a slight shock. In 1893, from entirely other causes, our financial ship bumped very badly. In 1907 w^e were on the deep waters of prosperity, where everytliing ought to have floated serenely, but we bumped hard. We stove open the bottom of the ship. We met with first-class disaster. Are we going to keep drifting, or are we going to do something? Shall what we do be comprehensive, or shall it be a mere makeshift? Shall the artificialities that have gone on for forty years be replaced by some other artificiality, or shall we consider and see if we can not in some way establish foundations harmonious and c(^nsistent with the true laws that govern the whole subject? Ihere are two measures that are proposed to Congress now. There may be others that I have not heard of. The one is the Senate bill introduced by Mr. Aldrich; the otiier is the House bill, which I hold in my hand, introduced by the chairman and referred to you. Both bills, I think, are now before the committee, are they not ? CURRENCY LEGISLATION. 195 The Chairman. Xo; the wSenate 1)111 has not come over to us. Mr. Gage. The Aldrich hill, 1 think will he clear enough from what I have said, I have no sympathy with at all. 1 do not think it is curative. I do not think it is curative of our evils. At hest it is a patch or a panacea, if it even be a panacea, wliich once in ten years may be availed of when the country is in a condition of intense panic, and when many of the evils of the panic are developing and existing, and it may not be effective then. In the meantime, if adopted, it probably puts us to sleep. It is a gentle narcotic that woos the community into a false rej^ose, I think, from which we will suffer many a nightmare, from w liicri we will awaken at last in trouble and real agony. Now, in contradistinction to that measure, there is this bill, wliich, as I said a little while ago, reaches to the foundation of things and it eliminates two of the artificialities which I referred to as blocking the road to reform. It eliminates gradually, or at an early period of time, the legal-tender notes without expense to the Government, thi'ough a tax upon circulation — but you are all familiar with the bill and 1 shall not particularize much about it. It forms a fund which will be applied without cost to the Government, to convert those $346,000,000 of greenl)acks against which $150,000,000 of gold noAV rests, into gold certificates, and especially it operates to put in the foundation of our bank credit the only foundation that can properly be used there under our present standard, viz, gold. It eliminates and takes out of existence the present national bank note currency. It operates, if it is to become a law, to impound the present United States 2 per cent bonds, amounting to about $700,- 000,000, iii such a way that they would never be competitive with a new" Government loan in the case of a foreign or domestic war. Thus the Government would face a situation then, with this law- operating and established essentially and radically different from what it occupies now, manifestly stronger. It would have no com- plications by reason of a demand debt of $346,000,000, and it would withdraw it entirely as a guarantor — as a guarantor of bank notes. Therefore it would manifestly strengthen the Government and elimi- nate it as an obstacle from the free operation of the banking and cur- rency principle which is sought to be established by this bill. It does more. The measure operates to coordinate the banks of this country and take away that tendency in a time of strain to repel each other, each one grabbing for its own life, for, if you remember, the bill divides the country into twenty districts, and it aililiates those banks in a way together by making each one of them redeem its own circulating notes at a given convenient city. It establishes a govern- ment over these local institutions by a body elected by themselves, consisting undoubtedly of the men of intelligence, power, and strength in the respective banking districts. It causes them to appoint a man. well paid, selected with reference to his endowment, whose business it will be to examine and inspect and report to the local government of that district the conditions and methods of business, the personal characteristics and qualilications of those who administer in that important field. It puts upon the banks of this district a penalty for a lack of fidelity and faithfulness in doing its work, because it requires that particular district to furnish 20 per cent of the loss occasioned to depositors or note holders by any bank in the district. 196 CURRENCY LEGISLATION". The Chairman. Ten per cent. Mr. Gage. Ten per cent. I always tliink of this as 20 per cent, because I think it should be 20. It puts them under a penalt}" of 10 per cent for default to the creditors of auA' one of their number, and makes them share ahke with all the rest of the banks in the country for the difference of SO per cent. These representatives of these dis- tricts, 20 or 10 — and I am going to say 20, you can call it 10 if you want to — meet together under the terms of the bill from various parts of the countr}' twice a year The Chairman. It ought to be four times. Mr. Gage. Well, they meet occasionally at stated periods. These agents who are the administrative ofhcers of these centers are sup- posed to have imparted to them the powers that exist in a deputy controller. Under the jurisdiction of the controller liimself these representatives are acquainted thoroughly with the methods and administrations of these various districts and the working of the machinery of the banking meet together and compare notes. Would not it be a most useful source from which to derive accurate knowl- edge and get information as to what was required in the way of reform and improvement of this method, that method, or the other method in different districts of the country^ It certainly would. The stumbling-block in the bill to most everybody, at first blush, is the guaranty of deposits. It stumbled me. I fell right down over that. I said never, never; no, that won't do. You are not going to make a black man as good as a white man by just washing him. But I reflected on this. I studied this bill, and I am per- suaded that it is just, equitable, wise, and right that the creditors of the banks which come under the provisions of this bill will have their deposits guaranteed to them as will be the bank's circulating notes held by the general public. The nature of the obligation from the bank is exactly the same in principle whether evidenced by a pass book or by the bank's notes in the form of circulating money; there is no difference in the principle. It may be urged that the man deposit- ing had the right of selection, and he acted upon his own volition, but when he took the note he was under coercion. There is a cer- tain plausibility in the argument, but where there is only one or two banks, or only three banks, there is not much right of choice when a man is imder coercion of a business necessity. The provision for the redemption of notes under this bill seems to me to be scientific, complete, and efi'ective in that it provides out of a general fund the expenses incidental to sending the notes from the place where they may be held to the place of redemption, and if you were a banker you would imderstand how restraining it is to pay 50 cents or 75 cents or SI express charges on the money that you want to have redeemed. Some pressure must come before they Avill do it. The bill puts the cost upon the issuing bank of express charges if it gets its notes out to distant points. It forbids under heavy penalty the counting of a dollar of credit notes to be issued under this bill as a part of a bank's reserves. And it does another very important thing, in my estimation. It will draw into the banks some five or six hundred millions of dollars of reserve money to strengthen the volume of liabilities that now exist in the banks of the country as a whole — State and national — without giving any additional power to expand. And when you CURRENCY LEGISLATION. 197 think of the many hunks in this country opcrutiiif; \sitli reserves of 6 or 7 per cent only, yon see how weak the foundation of the great credit structure is on whicii we are restin<^. Now, I have told you a little story of my experience and how I came to look at things this way. I think that the gentlemen who will follow me will give you some scientific reasons upon the subject that I have not indulged in. But if I were in a bank, clothed with the responsibility, which, thank God, I am now fi-ee fi"om — for it is a ^reat responsibility to a man who appreciates it and carries it — if i had the responsibilitv upon me, and haunted by the fear, as I always have been haunted, that by some concatenation of circumstances I might go to ruin and default, by so much destroying the general welfare and causing loss to my depositors, if I desired as I should to promote conservatism in the methods of banking, if I wanted to bring them back to the exer- cise of then- natural function, viz., to the exchange of its credit, I would, as a banker, ask to come under the provisions of this act and I would look with dread and apprehension if the bill offered in the Senate should become a law, for if adopted the curative work which can now be accomplished, or at any rate undertaken, under this bill would not be possible. Now, it seems to me that this is the critical hour. As I said in the beginning, I believe we have approached in our industrial and com- mercial life a crisis — a crisis in our legislative function in its relation to banking and currency. We are not in a political panic, and we do not \\ ant to get into any. We want to look at the thing fi"om the fundamental principles and the law of true economics, and to be gov- erned by wisdom and without prejudice, and to do our duty as we are able to see our duty. Now, I have talked too much, and if you want to ask me any ques- tions, go ahead. Ml'. Weeks. I would like to ask a question. If you were president of the Fu'st National Bank of Chicago, and the Aldrich bill passes, would you buy bonds with the possibility that you mi^ht want to use them, or would you wait until the time came and tlien depend on piuchasing them ? Mr. Gage. In the case of the First National Bank of Chicago I should not buy any, because they have got too many now. They have got an overstock. If I were in a country bank — if I may step aside from the particular case of the First National Bank — if I were in a country bank where I stood pretty close to the producers, where the goods of commerce originatecl, small factories, and where capital is scarce, and where my function as a banker was necessary to tne wel- fare, industry, and happiness of that locality, I would take my chances on going broke before I would take $100,000, if you please, if that was my proportion of this supposed relief, and tie it up m bonds, thus leaving my constituents without the facilities I can now furnish them and so taking from them the use of my banking power for an indefinite period of time. Mr. Weeks. This is a pretty practical proposition. The people of this country are satisfied that the circulation now existing is good. Do you think it would be judicious for Confess to pass the Fowler bill substantially as it is in its entirety and practically change our circulating medium at one jump? 198 CURRENCY LEGISLATION, Mr. Gage. Yes. I tliink the people would look upon $700,000,000 of bonds, if that is the way it figures up, as security for note redemp- tion guaranty, and for deposits, with perfect complacency. They would be very unreasonable if they did not. Mr. Waldo. If the Fowler bill were passed according to its present terms, it would, in effect, do away with all other banks, wouldn't it? Mr. Gage, It would be its hope that it would. Mr. Waldo. Granting the right to administer trusts and to accept savings deposits, and so on !Mr, Gage. It would, as drawn, 3'es. jVIr. Waldo. It would do away with State banks and State insti- tutions ? Mr, Gage. Yes. I confess when I come to the savings-bank fea- ture I have a little of what you might call the staggers, because I do not think that an^^body ought to take the savings of the poor for profit. That fund which constitutes the savings of the industrial classes, the benefit of it ought all to go to them as it does vmder the system of New York State, and I think New Jersey The Chairman. Nothing in New Jersey to speak of. There are only a few banks there. !Mr. Gage. Therefore I think it would be a happy circumstance if the New York savings banks will all go on uninterrupted and not be impinged upon by anj^thuig else, because I think it is most equitable to the depositors and is safe and for the interests of the poor — I mean the employed classes — as safe as an}' that could be inaugurated. But outside of New York City (where that fund is vast) it might be inaugu- rated, as in this bill it is provided, without particular prejudice. Mr. Waldo. The only ciuestion with me, Mr. Gage, is as to whether doing this through the complication of the savings and trust com- panies and national banks, wouldn't it tend to turn into permanent investment the business of the banks instead of having them attend strictly to commercial and industrial business? W'hat do you think about that ? Mr. Gage. I think not under the provisions of the bill, for it per- mits them to take money on short time — three months — that is, in the trust. I would like to say there that the banks are doing that same thing. I can not describe it to you exacth% but the First National Bank of Chicago, perceiving that they were threatened with ruin b}^ the competition of the trust companies and savings com- panies — I mean ruin to the profits of their business — they said, we must nave some power ourselves. And by an ingenious device or method they took SI, 000, 000 of their assets and divided them among their shareholders, and with that they incorporated under a law of the State a trust and savings bank. It is separate and distinct, but it is really managed by them, and the proilts go to the bank. The trust savings companv started with $1,000,000 capital, and it has doubled its capital, and it has $500,000 of surplus, and it has about $40,000,000 of liabilities. Othes banks are broadening upon that example, and it will be a common practice in the fullness of time. But that is not the ])oint that just occurred to me. We expect to get a coordination of ail the banks under a guaranty of deposits. What does happen, and what will hai)])en, ])robably more and more — it may not always happen — but a few months ago, perhaps two years ago, there was an institution in Chicago, the Chicago National Bank, CURRENCY LEGTSLATTOX. 100 of which Mr. Walsh was president. It had been in husiness many years. The agency of the Government had been lookino; at stated periods into its assets, and for a long time he had been violating ever}' law pretty nearly, and Mr. Walsh had been advised by letters written to him, which he had respectfully answered and had gone on just the same. But a crisis was finally reached when it came to the knowledge of the Chicago banks and the Clearing House Associa- tion, of Avhich he was a member, that AValsh's affairs were terribly mixed up, and he was in a ''bad way." I think it crept out from the Comptroller's office, or he felt a little weak and sent somebody to take hold of it, and the clearing-house committee of a Saturday night went over and demanded of ^Valsh a look at his assets, a demand he coidd hardly resist, since the Comp- troller's authority was on top if he did not respond. Thcv examined them and they found this situation: He owecl .f 27,000,000. He had the highest credit. He had city and county funds, park funds, State funds, and other funds, and the more intelligent of the bankers who looked over the assets hurriedly knew that there would prob- ably be a loss if the}^ took over his assets and assumed his liabilities, but they thought it woidd not do to allow that bank, in the fair, open sunlight of day, going on and doing business and accumulating these large liabilities under the auspices of the Government, to fall down and fail to pay and thus make an explosion in the financial world; so with the advice of some of the best business men in Chicago, among them IMarshall Field, having got from the directors all the pledges the}^ could get from them and the turning over of all the col- lateral from the directors they could get them to turn over, they took over from the bank the whole "caboodle" of assets and assumed and paid with no delay the liabilities of the Chicago National Bank. They did that under the worst kind of circumstances, viz, where there had been years and years of business which they had no ability to ascertain or find out about, they thought it was for their interests of guarantee the deposits of John Walsh, with the absolute certainty to loss, and if you want to buy the claims of some of those banks at a considerable discount I will agree to negotiate them for you. Well, they learned a lesson, and they adopted another principle, a prin- ciple provided for in this bill. By the vote and the voluntary com- pliance by all the members of the Clearing House Association, they authorized the clearing house at any time and at stated periods to act upon its own volition and on its own account and for the infor- mation of the clearing-house committee itself to have a full, complete, and comprehensive investigation of each member of the association, and not only of each member but of every institution that carries the name of bank over it that is cleared or represented in the clearing house by a clearing-house bank, and I can tell you as a safe j)rophecy that we are at the end of disastrous failures in the city of Chicago by clearing-house banks since this regime has come in. I am told that Kansas City has the same thing. And other cities will eventually adopt it. The Chairman. And at St. Louis. Mr. Gage. Now, they are doing as Saint Paul says, without the knowledge of the law as it is required by the law: they are under grace, or something like that. But the law ought not to create so very much. It ought to discover and recognize and sanction. Men 200 CURRENCY LEGISLATION. who have hved in a free state for a long time work out those rules and plans of action between themselves which are perhaps on the whole the best for them. These when just should be sanctioned by the law and made universal. But what I have just referred to as the Chicago National Bank is not extreme. They hung a man in Baltimore many years ago. He was a banker and failed, and the}' hung him to a lamp-post, and I don't think there has been any bank failures in Baltimore since. They cooperate and talk each other over and see to each other before they fail. Under this bill they will see to each other before they fail. Mr. Weeks. Don't you think that it is the fault of the Govern- ment that the condition existed that did exist in the Chicago National Bank? Mr. Gage. Why, yes, you might say so, but the Government is impersonal and its agencies are perfunctory; they are human and the law is not very thorough. The Comptroller can under the law, I believe, have a national bank go under a receiver provided that they fail to pay one of their circulating notes and it goes to protest. I think if a bank goes under its reserve for thirty days and fails to make good, after being notified by the Comptroller, if I remember right — I am a little rusty — an application might be made for a receiver. He can ruin any bank if he has a mind to, by having his examiner take possession of it, but I do not know of any law for it. The Chairman. With reference to ^Ir. Walsh's banking connec- tions in Chicago, is it not true that he had under his administration two other banks than the Chicago National, and it was through the manipulation of the assets of those banks that he was able to bor- row — how much from the three banks? ]Mr. Gage. I think about five or six millions. He had an institu- tion incorporated under the law, with a beautifid name, the Equitable, a fine name — the Equitable Trust Company — and in that he gathered money which the Chicago National Bank knew how to use, or rather, ISIr. Walsh, in constructing certain railroads. He had another insti- tution to gather money, called the Home Savings Bank, I think, and what they gathered in were contributing elements of strength like- wise to the Chicago National Bank. ^Ir. Waldo. There is another question I would like to ask, and that is, whether the gold reserve of any bank ought not to be kept in the vault of the bank instead of being deposited in some other bank, where a part of it ma}^ be loaned under the present law, and I think under this bill. Mr. Gage. This bill strengthens that in the manner that I speak of, and I \\ould answer your question that we allow too much ot the reservation to lie at rest in the hands of some other bank; but a portion of the reserve miglit thus lie in a system that was well estab- lished and perfected. Mr. Waldo. And it is true, isn't it, under the present law, that the money that is deposited in central reserve cities can be loaned up to 75 per cent? Mr. Gage Yes. Mr. Waldo. So that when the reserve is not with the bank that owns it, there is but 25 per cent that is in actual existence? Mr. Gage. That is right, and that is what causes, with the annual returning crop movement, a crisis and a threatened panic in Wall street year after year — that, and because there is no svstem of credit CURRENCY LEGISLATION. 201 currency which is held in reserve from which to distrilnite the credit in whatever manner it should be distribvited. Mr. Waldo. The amount of reserve that is held in New York City at the only times when it is needed in the country is small — between two and three hundred millions. Mr. Gage. More than that; between three and four. Mr. Waldo. So that in the fall, when that is needed by the country, saying it is four hundred millions, there is only actually in existence in New York one hundred millions out of the four hundred? Mr. Gage. That forms the reserve for that four hundred; yes. Mr. Waldo. So that the banks of the country that are supposed to have four hundred millions of reserve as a matter of fact only have one hundred millions in actual existence. ^Ir. Gillespie. I understand that you consider one of the virtues of the Fowler bill — that is, it requires the banks to carry a gold reserve ? Mr. Gage. Yes. Mr. Gillespie. But the bill says that it may be carried in gold or its equivalent. Mr. Gage. Yes. Mr. Gillespie. How would you interpret ''its equivalent?" Mr. Gage. I would interpret the "equivalent" at the present as legal-tender notes. I would interpret as another equivalent silver certificates. The silver certificate we have with us — and we can not run away from that — it is a pity; it is a pity because when the coun- try is strong in metallic money we not only have the bulk of the re- sources of the banks, but they will have distributed in active circula- tion through the people a considerable volume of gold or other standard money which, when the time of liquidation comes and the outward movement sets in, may to a degree be drawn and some substitute made in place thereof to tiie great benefit of the country and the Government. Now, six hundred millions is a pretty large volume when it is in silver certificates. It is in the hands of the people largely, and as long as it circulates there it will not endanger tiie Government guaranty for a parity. You have got to have a guard for it, and so far the field of circulation has been given the preference to silver certificates in the case of one and two and possibly five dollar notes, so that money absolutely in men's pockets will absorb substantially the sil- ver certificates, and then they will not be in the bank reserves. Mr. Gillespie. Under that construction of those wortls it would also practically cover every form of currency that we have. Our bank notes are indirectly convertible into gold. We can take them and get the gold on them. If you are going to allow the banks to keep gold or its equivalent, and if you interpret the present kinds of currency in existence the equivalent of the goKl dollar, wmddn't a bank be authorized to keep any of the present form of currency in its reserve as well as gold? Mr. Gage. That could be best answered by the language of the bill itself. Mr. Gillespie. It is in just these words, "gold or its equivalent." all the way through. Mr. Hayes. Mr. Gillespie's point is that l)ank notes secured by bonds as at present rest ultimately upon the Treasury of the United States for redemption. 202 CURRENCY LEGTSLATIOX. Mr. Waldo. Another point: This bill provides that this board of managers in the respective redemption districts, except savings banks and trust companies, may fix the rate of interest that these institutions shall charge and destro}' competition between them. Now, do you think that is a wise provision, just that feature — that this board should have the right to fix the rate of interest ? Mr. Gage. I think it is a wise provision and a necessary one; yes. Mr. Waldo. It would destroy competition between these institu- tions. Mr. Gage. In that form, yes. Mr. Waldo. That would leave loans to be placed whether they were good or not, instead of upon how much bonus or interest they would pay? Mr. Gage. Yes. Mr. Waldo. It would be an element to do away with bad loans? Mr. Gage. I think so. The Chairman. There is one more question that I would like to ask, Mr. Gage. Do you think that this guaranteeing of deposits would lead to unsound banking? Mr. Gage. No, sir. I think the fact that under your bill there would be a penalty for neglect of inspection, and that there would be the machinery for inspection, would lead to sound banking. The only restraint upon the bank officer really is the fear of loss, not to his depositors, but to his stockholders. That fear and restraint would be as operative under your bill as it is now, and the influence of the inspec- tions and the restrictions that would be formulated by these associates who have to bear part of the risk that that man takes if he goes wrong is a pretty good insurance that he will go right, and if he goes right he will go in conformity with the principles of good banking instead of going loose like- a wild horse on the prairie. Mr. Crawford. What do you say produced this panic ? Mr. Gage. It would take about five minutes to tell you that. Mr. Crawford. Take the time. Mr. Gage. This, I think, is the true story of it. I spoke a little while ago about the ability of the banks with the present system of currency, with national bank notes to aid them, to get in reserve money and expand their loans and discounts on that basis. This went on, and the loans were based not on commercial assets nor put out in the interests of industry or commerce; the}^ were put out to carry fixed forms of securities either in the form of stocks or long- time bonds, and the percentage of loans on these kinds of securities last named, the percentage in proportion, has constantly grown. I hope some of the gentlemen who succeed me will give the figures. Now, the banks in New York and the great centers had the theory that they wore the best securities in the world for a bank to loan upon. If they had margin enough upon these securities, it did not make much difierence about the quality of the borrower, as they could at any time take those securities in the market in the stock exchange and sell them and realize the money on them. They forgot that the banks had all the money all the time, and that there never was any stock of money to be got from the street; they forgot that when everybody are sellers under the necessity of contraction there can be no buyers. They forgot that in undertaking to realize upon this CURRENCY LEGISLATION. 208 class of securities beyoiul a certain point they W(juld simply ruin the quality of the collaterals which remained behind that they could not market, and they had to draw a line where they had to stop and rest. That was the situation that was found in the close of the year 1907, viz, extended loans, narrow resources, and a great volume of long- time obligations, which ordinarily would be taken over by the investor, who is the man that ought to have them, for he is the man who has the funds to invest in long-time securities, not the man or the institu- tion that owes money on demand. Anticipating the future and encouraged by the fluency and activity of things, the banks took on as intermediaries between the purchasers of these securities, the investors in these securities, an enormous quantity of these stocks and bonds, which they held in the faith that they would run off on the other side into the investors' hands, and the value would be recov- ered in the bank, and fresh securities of a similar kind taken on. Now, as in every fall, the crop movement came, the best we ever had in many respects, and the banks in New York, as my friend over here said, owed between three and four hundred millions of dollars to the interior banks, and the necessities of the occasion compelled the banks in the interior to make their natural and just requests upon the central banks for something to "move the crops." Of course, in the absence of any currency system of the credit kind the banks had no power to help themselves by issuing their notes — I mean the banks outlying all over the country — neither had the New^ York banks any power to convert their obligations, as evidenced by their books, into note obligations which they might send out, and which, if used, would answer the purpose perfectly well. No; they were obliged to take the cash reserve money on which the local credit structure four times as high rested. Every dollar pulled from the reserve to furnish this temporary use in the country helped to pull the foundation out from under the structure. Now, there were other elements of destruction. I will not enumer- ate them. There had been many loud voices of denunciation from many quarters, and they had scared the investor, lie did not want to buy at that time, and the banks, moved by a natural instinct to strengthen their position for the outward movement, called upon their borrowers, carrying these securities for payment, and these borrowers tried to pay, they tried to pay by selling their securities, but the investor was not there, he was afraid. Other banks were not in any better position because they were all in the same position, substan- tially, in relation to the countr3\ The downward decline of these securities under this pressure in the stock market is well known. The banks in the country had also learned that on three separate occasions their balances in New York had suddenly been tied up, and when they telegraphed for money that was due them they got wires back saying, "We are not sending currency." They had been embarrassed and choked and garroted on three or four occasions in previous times. They learned some- thing by experience, undoubtedly — human nature will. There was a crisis, and the banks of the country did not wish to be again surprised, and they telegraphed to the New York banks for money that they did not need, anticipating if they did not get it then they might not get it at all: that aggravated the situation, and the next time it will be worse than it is now. Thev have learned 204 CURRENCY LEGISLATION. the lesson more deeply and better. Then was witnessed also the troubles of the Knickerbocker Trust Company, which I know had been looked upon with distrust by the city financial institutions in New York, but they had not power to do anything; they had no personal knowledge, only instinct, but with a certain belief in their minds that if a crisis ever came the Knickerbocker would be a complicating factor in the situation. I w^as told two years ago by men who knew in a general way about it, but they had no power, they could not slander their neighbors, they could not use what they knew intuitively, with no evidence. The Knickerbocker, with 5 or 6 per cent of resources, waved the flag of distress, and what was a crisis and a developing crisis scared the savings banks. The savings banks have a natiu'al pride in meeting the requests of what they call their customers and they undoubtedly drew large amounts of money which tliey usually kept on deposit with New York banks into their own coffers. How much I do not know. It would be interesting if somebody did know. That and the newspapers and the action of the banks in the country scared the banks and put them to considering the necessity of protecting them- selves, as they had before, by shutting down and refusing payment, and that was a panic. Then it was a panic. Well, what did they accomplish by the clearing-house certificates? They do provide means for liquidation to each other, and thus pass the burdens back and forth according to their respective strength as developed in the clearing house. By shutting down and refusing to pay, but compelling liquidation to them from those who owed them, merchants and manufacturers against whom they held a claim, they strengthened themselves, canceled the clearing-house certificates and resumed. I think that is a fair sketch of the causes of the panic. Mr. Waldo. I move that a vote of thanks by the committee be tendered Mr. Gage. Motion seconded and carried unanimously b}* a rising vote. (Thereupon the committee took a recess until 2.30 o'clock p. m.) CO^IMITTEK ON HaNKING AND CURRENCY, Felrvary 19, WOH. AFTERNOON SESSION. The coiiimittee met, pursuant to adjournment, at 2.30 o'clock p. m., Hon. Charles N. Fowler (chairman) in the chair. The Chairman. The committee will please come to order. We have Mr. Conant before us this afternoon. Mr. Conant desires, as Mr. Gage did, to proceed uninterruptedly until he finishes his state- ment, at which time he would be \'ery glad to have anybody ask him questions who desires to. STATEMENT OF MR. CHARLES A. CONANT. Mr. Conant. Mr. Chairnum and gentlemen of the committee, I desire to approach the problem from a somewhat difierent side from that presented so luminously and eloquently by Mr. Gage. I feel that the problem is something more than a currencv problem. I have always been a pronounced advocate of a change in our bank- note system which would give it greater flexibility and greater adap- tation to business conditions. I have not in any way modified my conviction that those changes are essential, and those changes I be- lieve this bill of Mr. Fowler's accomplishes in a satisfactory way. But beyond that there are certain changes in our banking methocls Avhich should be made w^hich are difficult to attain by legislation, but which I believe this bill does go a very long ways toward attain- ing. The distinguished author of the bill which is pending in another branch, which I believe it is not permissible to name here, has him- self outlined some of these requirements. He says in a paragraph of his speech purporting to have been made in this other body: A general demand for a reform in banking methods is quite as insistent in the public mind as that for a modification of our monetary system. The great mass of the men who control the national banks of the country are strong and liberal minded. Their influence and that of the institutions they represent has been helpful in the great work of national development. But these men, intrusted with the management of great financial institutions, which can do so much to make or to mar the prosperity of our country, should realize that they have serious responsibilities with reference to existing conditions and the necessity for reform in Ijanking metliods. In another place he says: We should constantly bear in mind the danger of um-estricted expansio n. It leads to infla tion, and inflation must end ultimately in disaster. And still again he says: There is another disquieting element of quite as serious a nature. It is tlie dis- covery that many national banks have been directly or indirectly f urnishing capital !for s peculative ventu res. Some of them have been largely engaged in promotmg or underwriting questionable business scliemes. All of these operations are clearly outside of the .scope of legitimate banking and serve to bring discredit upon all of iQur banking institutions. Now, it is the great merit of the bill pending here that it does auto- matically, us it were, and through the great motive of self-interest 205 206 CURRENCY LEGISLATION. operatino- upon the minds of men in business affairs, correct many of these evils, or, rather, instead of correcting them after they have occurred, anticipates and prevents them before they occur; and I regret that the gentleman who made these remarks did not incor- porate in his bill some provisions which would tend to accomplish these results. The evils to which he refers are not limited to the national banking system. On the contrary, they are perhaps more extensive in other parts of the banking system of our country, if it can be called a system; or, rather, they are more conspicuous in the polyglot and varied systems which mark the banking organizations of the different States, and the time has come, I think, when this com- mittee and Congress should take cognizance of the fact that the bank r ing system. of the Union should be a coherent whol e ; that it is not possible to shoulder upon the national banks the'position of the reserve banks of the country when they have no control — and Federal law exercises no control — over a multiplicity of other institutions, the burden of whose responsibilities falls ultimately upon the national banking system. Our whole system as at present organized, or, rather, as at present existing — I can hardly call it organized, but as at present constituted — is incohereir t^_di siointed, and as the previous speaker has so eloquently said, its units tend to become repellent, to become hostile one to another, when a great crisis occurs; and it is the great merit of this bill pending before you that it meets many of these difficulties in an efficient, scientific, and natural manner. The side from which I desire to approach this problem is the side which was briefly touched upon by the previous speaker in answer to a question as to what were the causes of the recent crisis and pa nic. He correctly said that tlie cause lay in the treniendous expan sion of loans upon se curities. Loans upon securities, in my opinionTwHen they are carried~beyond a reasonable limit, are a serious source of weakness in any banking system. A great English writer on bank - ing said that it was easy enough to conduct the business of banking if you could distinguish between a bill of ex chMige and a mortgag e. Unfortunately, in our recent banking we Iiave failed to make that distinction, and we have failed to make it because of the deceptive character of negotiable securities. The national banking law, I think, specifically prohibits loans upon inortgages, but these great loans on negotiable securities have substantially the character of a mortgage. At first sight that proposition may seem diflRcult to grasp, but if you think for a moment of the character of negotiable securities, you mil see that it is sometimes that of a mortgage and sometimes much worse than that of a mortgage. A bond is in a sense a mortgage; in fact, it is usually a mortgage. If it is a poor bond — a bond based upon collateral of doubtful character, or based upon any miscellaneous thing that you can never lay your hand upon in case of default, then it is not a mortgage, but something worse. The reason for the confusion on this question is that these mortgages are given a divisil)lo and circulating form. The difference between fixed capital and circulating capital is the essential (fifference between mortgages and commercial paper. The distinction is confused by the conversion of mortgages into divisible and easily transferable parts; but tiiis does not change the nature of the security. Because you have taken a mortgage for $100,000,000 on a number of miles of trackage, and then split it up into parts and CURRENCY LEGISLATION. 207 thrown those parts on the market and jnade it easy to transfer them, it does not change the fact that the capital apphed to such an invest- ment is in a fixed form; that the capital which has heen put into that railway property is invested in a way in which it can not be got out; that it is, in other words, a mortgage and nothyig l)ut a mortgage; that it is fixed capital and not circulating capital. And it is circu- lating capital which it is the legitimate l)usiness of l)anks of discount to deal with, which is the legitimate basis upon which to lend money which is repayable on demand to depositors. To illustrate, it is the capital of the woolen manufacturer, who buys his wool and converts it into cloth and sells it to a jobber or retailer, from whom it goes to the consumer, and when the process is com- pleted the money comes back through its various channels, the money is paid, and the notes are all taken up and the transaction is closed. If the demand for woolen cloths diminishes, then the pro- duction of wool diminishes and the production of cloth diminishes and the number of bills for discount based upon the transactions is diminished. Not so with your fragments of mortgages which are called bonds, or your fragments of something else which are called stocks. They do not diminish in quantity naturally in time of crisis. They undergo no automatic diminution except under the pressure of a financial crisis producing bankruptcy and liquidation. Every banker in Europe recognizes that distinction — that the legitimate object of loans of deposits payable on demand is circulating capital — the proc- esses of production of current products which go into consumption. They recognize as absolutely unsound loans upon mortgages or loans upon those divisible parts of mortgages which we call bonds, and those remote claims upon contingent earnings which we call stocks. Now, this is a somewhat abstruse ])roblem of political economy, and it is difficult to make it perfecth' clear, always, to one who has not followed the unfortunate state of those banking institutions which have ventured to make loans upon bonds and stocks when they have held themselves ready to pay their depositors on demand. The Eeople who can legitimately invest in those securities are private ankers who hold funds placed in their hands for such investment, and with the knowledge of the depositor that those funds are to be so invested. The banking institutions which, like the Knickerbocker Trust Company and some other companies in New York, have chosen to make loans on securities that were not readily marketable under the best conditions, are criminally negligent, and are guilty of a viola- tion of sound banking principles. And as the previous speaker said, the reform of the currency will not entirely cure that. It will go some ways toward it, and will enable the bank to turn the corner after the liquidation has set in, and to avoid the shock and to avoid suspen- sion of currency payments, a suspension that for a nation as rich and as powerful as ours is more disgraceful than is the suspension in some South American country upon the brink of civil war. For the banks of this country to suspend currency payments is sub- stantially the same thing as the banks in other countries have done when they have suspended the redemption of their notes in specie. Wlien currency went to a premium of 3 j and 4 per cent, as the previous speaker well said, it was worse than the condition which occurred with the Bank of France in the period of her acutest agony. The suspen- 208 CUBREXCY LEGISLATION. sion of currency payments by all the banks of the United States is a disgrace to our credit and our financial honor, which never could occur under a sound system. It is not, of com-se, the fault of the individual banker, but of the system, and we are here asking you to correct that system and establish a system which will save this great, powerful country' from that infamy and put it upon a plane with every other great civilized state. But I do not want to wander for the present from this question of negotiable securities. "Wonderful as has been the benefit of this system in establishing lindted companies, in issuing their securities and putting them upon the market, of drawing into the market the small savings of the people of the country in those investments, the expansion lias been so rapid that it has outrun the experience of men in dealing with it. The statistics compiled in Europe and in this coimtry show that from two to three billions of dollars' worth of new securities have been offered upon the market annually witliin each of the past few years. In the United States alone I found by recent inquirv that the securities wliich I coidd ascertain were in existence had a par value of about S34,000,000,000. Think of it, $34,000,000,000! Our whole national wealth, according to the census of 1904, is only $107,000,000,000. Almost one-tliird of that is in negotiable securi- ties. Of course reductions should be made for securities of one cor- poration held by another corporation, because that is in a sense reduplication, doubling of the obligation upon the same property; but even making those deductions so far as the data at my command were available, amounting to about S10,000,000,000r we still had left in outstanding securities in 1905 about .|24,400-,000,000 worth of stocks and bonds at their par value, and their par value, it so happened, at that time did not differ very widely from their market value on the average. Of course many were below par, but others were above par, so that the average market value did not differ widely from the par value on the 30th of June, 1905, the date fur wliich these statistics were made up. I hardly need to say that there has been a very considerable fall since, a fall computed by one of the New York journals as high as .15,000,000,000 — five thousand millions — and that in a sense is the price we pay for unsound banking methods, a defective currency system. That terrific shrinkage of five thousand millions of dollars came on those securities because we had loaned too much on this class of securit}' and because we had no adequate currency system to even break the force of the descent. Now, when a bank ties up its deposits payable on demand in that form of security, it takes a very large risk. Of course the big New York trus-t companies, and many other trust companies throughout the country, have been able to protect themselves against that risk, so far as they individually were concerned, by looking ahead, by anticipating this crash, by calling upon the people to whom they had made loans either to increase their margins or to increase thier deposits of .'securities or to withdraw tlieir securities. All through the year 1907, and perhaps for some montlis before, farsighted bank- ers were going through their (u)llateral and weeding out imlustrisls and other securities which they considei-ed might decline sharply in case of a crash in the market, and that they did wisely as prudent bankers was shown by the result. The}' did the only thing they could do for the protection of the interests of their depositors and share- CURRENCY LEGISLATION. 201i holders; but in doino; that they were simply protecting themselves at the expense of others. As the previous speaker so well |)ointed out, when the time came that these calls were made either to increase margins or to increase collateral — to increase securities or to pay up their loans and withdraw their securities — the means were not found for dcang that by the people who had received those loans except by frightful sacrifices of securities. They said, "We can not do it, we can not deposit further margins, or we can not deposit more collateral, and w^e can not take out what we have," and those securities were thrown on the market and sold for what they would bring. The sacrifices were terrible, and that is what brou";ht on, first "the silent f>anic" of March 14, and then a repetition or the steady downward all of those scurities in August, and linally the confession that there were a few banks and trust companies, even, which could not stand the strain which had been imposed with such severity upon their various clients. The fundamental defect in those loans is, as I have already inrli- cated. that they are mortgage^ and not circulating capital. Then there is the further fact, in addition to that, that these State institu- tions, trust companies, and State banks are under no control what- ever of the Federal law, except in the prohibition to issue notes, not even to keep adequate reserves. I want here to put into the record of the committee some statistics bearing upon that point, and I will briefly sum up a few of them. Growth in State banking, 1898-1907. Item. State banks. Trust companies. 1898. 1907. 1898. 1907. Number 3,965 ; 9,907 $1, 356, 084, 800 i ?4, 119, 190, 337 912,365,406 ' 3,068,649,860 133,877,133 254,001,570 76,064,610 192.737,361 116,464,999 171,112,891 131,685,788 489,504.637 621,220,194 2,139,8.30,544 246 $942, 462, 179 662,1.38,397 22. 2.10, 862 92, 175, 473 303.790,563 193,977,752 143,196,409 794 Total assets. . . $;?,071.419.360 Indivndual deposits 2,061.6*23, 035 101,719,515 Loans on real estate 174,2.35,578 Loans on other collateral security 823.109.861 785. fi99. 670 604,018,708 SUMMARY. Total deposits: 1898 $1,574,500,000 1907 5, 130, 300, 000 Increase. 3, 555, 800, 000 Total cash: 1898 160, 000, 000 1907 350, 000, 000 196, 000, 000 Increase Total loans not commercial: 1898 588, 500, 000 1907 1, 361, 000, 000 772, 500, 000 Increase Total bond and stock investments: 1898 ■ 325, 500, 000 1907 1, 275, 500, 000 950, 000, 000 Increase Total resources: National banks (May 20, 1907) $8, 476, 501, 434 .A.11 other banking institutions (June 30, 1907) 11, 168, c»14, oI6 37881—08- -14* 210 CURRENCY LEGISLATION. These statistics not only show a reduction of the reserves, but an amazing expansion of this form of banking within the past nine years. I took the figures for 1S98 and 1907 for State banks and trust companies as reported bv the Comptroller. The assets of the State banks expanded from S1^300,000,000 to $4,000,000,000, and of the trust companies from $942,000,000 to $3,000,000,000. Now, it is obvious that that expansion of liabilities called for an increase of reserve money, a strengthening of the resources of. the banks. The total deposits of both State banks and trust companies in 1898 were $1,500,000,000, and in 1907 $5,000,000,000, or an increase of more than three and a half billion dollars. The total cash increased from $160,000,000 in 1S9S to $356,000,000 in 1907. In other words, their cash reserves stood after the increase at an amount sufficient to pay about 7 per cent of their deposit liabilities. No wonder the Knicker- bocker Trust Com})any and some others, even if they had the average reserves of the State banks and trust companies of the country, felt it necessary to lean upon the national banks in the reserve centers when there was a run upon them for their deposits. Now, you may say, ''To be sure, their reserves were somewhat limited, but perhaps the}^ had splendid commercial assets." Not so; at least, not to a very great degree. The total loans not commercial were in 1898 $588,000,000, and in 1907 $1,361,000,000, an mcrease of $772,000,000, or much more than 100 per cent. But that was not all. Their total bond and stock investment (which we are asked to increase and set aside and hold in reserve as security for new issues of notes in a bill pending in another chamber) increased from $325,- 000,000 in 1898 to $1,275,000,000 in 1907, an increase of $950,000,000, or very nearly 300 per cent. Now, those two items together, total loans not commercial and total bond and stock investments, made up more than $2,600,000,000 of the assets of State banks and trust companies, their total assets Deing about $7,000,000,000. That would not be so bad in itself if it nad been in evenly distributed proportions, but in the trust com- panies it was worse than in the f ase of the State banks. As to the loans on real estate and other collateral security, the loans on real estate of course were small and on other collateral securities, stocks and bonds, those held by State banks were very much smaller in pro- portion than in the case of trust companies. Now, the trust com- panies had been going on doing a large and profitable business for many 3^ears, and manj" of their officers believed that the}^ could lean absolutely upon the national system; and so perhaps they could if the national system itself were sound. But the national banks of the country to-day have been compelled, through the lack of any co- herence, of any coordination with the State systems, to become the reserve center, the reserve system of all the banking institutions of the country; and inevitably laws which were perhaps wisely framed so far as reserves were concerned in 1864 have proved inadequate when the total liablilty imposed upon those reserves has been doubled without essentially increasing the reserves. In other words, the national banks of the country as a whole have actually now an ulti- mate reserve liability for all the State banks and trust companies of the Union, because those companies, governed by the varied laws of diflferent States, and in most cases by very loose laws, do not actually carry reserves which are in an}^ way adequate. CURRENCY LEGISLATION. 211 Now, under this situation, when this entire pressure was focussed upon the httle })and of national reserve banks in New York City, is it any wonder that they broke down under the burden ( Is it any wonder that we are here asking modifications of our banking system which shall not only give greater flexibility to the system of note issue, wliich is a great- safeguard and resource in emergency, but are also asking the adoption of the comprehensive features of Mr. Fowler's bill, wliich will coordinate all these discordant factors? 1 have shown you that the loans were not made altogether upon sound ])rinciples. If they had been made upon sound principles, they would have neen very much smaller in amount; but even if we had left them where they stood, if we had admitted their propriety, it was still essential that there should be adequate reserves held against them somewhere, and under the national banking law of course there was recognized only the obligation of the national banks of reserve cities to national banks of the smaller reserve cities and of the country at large. Nowhere in our existing legislation and our existing system is there any pro- vision for providing an adequate reserve against this enormous mass of outside liabilities, in itself largely rigid, inflexible, and not based upon sound banldng principles; and Air. Fowler's bill, j)roviding for bringing the trust companies and national banks into the national banking system, tends to give that coordination, that cohesion and that correlation which are essential if we are to become a solvent financial nation. And his other provisions wliich introduce mutuality among the banks, by imposing the burden of losses upon the banks of a given group, and authorizing examinations in anticipation of bad loans instead of after they are made, all point in the same direction and tend to a cohesion and to symmetry and unity which can never be found under our existing system, even with adequate modifications of the provisions in regard to the issuance of notes. One of two things should be done — either a measure like this should be enacted, or a much larger reserve should be recjuired from the national banks of the central reserve cities, in view of this great con- tingent liability of State banking institutions. Inevitably the only sound measure is a measure which shall coordinate the entire system, for a mere addition to required reserves in proportion to direct liabilities might be insufiicient. If the national banking system of New York should cease to grow and the State bank and trust com- pany system should continue to grow, then a few per cent more of national bank reserves would not meet the extension on the part of the trust companies and State banking institutions, nor of those same institutions scattered over the Union which keep their reserves largely on deposit in New York. The guaranty for deposits tends, in the same way that it tends to prevent the panic before it occurs, to prevent unnecessary and unwarranted runs on the banks of the country as a whole, and to remove the danger from the local banks, and it removes the motive from the local banks for appealing to the financial center at New York for excessive and unnecessary accunuda- tions of money. Still another menace is involved in this tremendous expansion of trust company and State banking obligations without adequate reserves, and that is this, that in those reserves are counted almost without restriction, indeed, entirely without any restriction under State law, the notes of national banks; and you all know that those 212 CURRENCy LEGISLATION. notes of national banks as they are issued to-day are not even linked to the gold movement of the world, that they are issued upon fixed securi- ties, just the form of loan I have been decrving. Thev have expanded within seven years, from 1900 to 1907, by $440,000,000. Now com- pare these figures with the increase of reserves in State banks and trust companies. The increase in reserves in State banks and trust companies from 1898 to 1907 was S196,000,000, while in the case of bank notes the increase was more than twice that sum, Now, whether actual physical bank notes were put into those reserves or not, the fact remains that bank notes were issued in excess of this increase of reserves and took the place of so much legal tender money in circulation if the latter was held in reserve. They afforded no adequate reserve for the tremendous extension of trust company and State banking obligations, and in fact you v>^ere building a struc- ture of paper, one story upon another, not even the narrow founda- tion of which rested upon the world's money of exchange, gold coin. Perhaps the State banks and trust companies are to be congratulated upon their moderation, that instead of expanding their obligations by only five l)illions during the last five or six years, they did not expand them by ten billions; and they probably would have done so if passably good securities had been offered as collateral for the loans. It is amazing, it is impossible, that any civilized country can fo on pyramiding one paper obligation upon another in that way. t is a wonder that it went on so long. That the crash was not worse is due to several things. First, our Government money this time was based on gold, and there was no question but that any Government obligation would be kept equal to gold. The second thing was the moderation and conservatism of the bankers who, even though they did not all understand the prin- ciples I have stated — the limiting of commercial loans to commercial paper — did not make loans on very doubtful and dubious securities. But so far as their power was concerned, theoretically, they might have gone on expanding, issuing stocks and bonds, and loaning on stocks and bonds deposited as collateral, and depositing Government bonds for bank notes and using these notes as legal reserves against their expanded loans. Now, we have pending over in another Chamber, a measure which, if it were not for its tremendous restric- tions, would open the door wider still, and permit, as has been talked of at different times, two billions of municipal bonds and six billions of railroad bonds to become a possible basis of further issues of so-, called currency having no relation to the world's great movement of gold. Why, if it were not for the 6 per cent tax proposed, which practically renders the measure nugatory and prevents the issue of the notes except in the most serious emergency, you would open the door for a very saturnalia of paper such as was never known. To my mind the ideal currency is a currency of bank notes redeemable in gold, through certain convenient agencies, and every nation but ours has recognized that. There is no nation to-day calling itself civilized, except possibly among the Latin-American states, which has not a better system than ours, or which is not better qualified and prepared for the emergoncy of war. I was out of the room for a few moments while Mr. Gage was speaking of that. The Chairman. Go on and make your own statement. Mr. CoNANT. I do not know whether he pointed out the two alter- natives that would confront us in case of war. The two alternatives CURRENCY LEGISL.\riON. 213 are these: Either the Government would be compelled to sell its bonds at a reasonable rate of return which would make them accept- able in the market, say 3 V per cent — they could probably sell 3i per cents at par — either they would be compelled to do that, which would depreciate the existing 2 per cent boncls down to, we will say, 80 or probably lower, possibly 75; or they would be compelled to issue 2 per cent bonds and get the banks to take them. In the former alter- native, the issue of 'Ah per cent bonds at par, which would force a de- cline of the old 2 per cents to 80 or 75, wdiat would be the state of the bank reports made to theC\)mptr()ller ? The institutions holding those bonds would have to write off on the old bonds 25 to 30 per cent of their capital if they had the whole of their capital invested in bonds. FeW' banks could stand that. Would such a report show any con- siderable surplus or any undivided profits left in the banks as a whole? It W'Ould certainly show that many of them had wiped out their surplus, and had their capital impaired. Take the other alternative, that the Government -said, "We have sold $700,000,000 of 2 percents in the past. Now we w411 put out a billion more twos." Evidently that billion of twos as the basis of a billion dollars of bank notes would cause suspension of gold payments and drive out approximately a billion dollars of gold and we should be floundering in a mire of paper worse than that in which we flound- ered during the civil war. I can see no escape from that conclusion if we continue the bond basis and extend it still further. I consider any bill that enables the further extension of the bond sj^stem as bad as any measure that w^as ever proposed by a South American dictator. It is perfectly suicidal to propose further extension of circulation based on bonds. You have either got to tie up the cir- culation so that it will be futile and not be asked for or cut your circulation off absolutely from the anchorage of the gold standard. I know that some of my statements may seem extreme and perhaps theoretical; and yet we have got to look at the problem in its broader aspects to-day; w^e have got to look at tendencies; we can not wisely adopt something we know" is dangerous, because we have tried to draw the fangs by making it inoperative. What is the use of pass- ing something that is based on an unsound principle and then trying to make it sound by making it impossible'^ Now^, there are several possible remedies for the evils we have de- fined. Of course a central bank woidd correct some of the evils under which w^e have been operating. Its great merit would be that it w^ould control the financial situation in New York in a way in wliich it can not be controlled now until we are in full crisis. When we have a crisis now^, wdien tw^o or three big trust companies are suspending, the clearing-house committee gets together and says, "Now we will do something; we will issue clearing-house certificates and save the situation." A central })ank saves the situation in atlvance. I shall point out that the bill here pending paves the way for a central bank and makes its operation more steady and effective when wo ol)tain it. But the great merit of a central bank is that it can control the (liscount rate, as is not done under the present law. Theoretically it is con- ceivable that the presidents of the big banks, or that the clearing- house committee, could get together and say, "Gold is going out and speculation is excessive; we will raise the discount rate from 4 per cent to 5 per cent, and we will raise the rate for call money." But evervone familiar with banking in New Yt)rk knows that this does nOt 214 CURRENCY LEGISLATION. happen. Each bank acts for itself. There are some banks that would like to act in that way. But if you had a central bank, with several officials of the Government sitting on its board — not to control it sordinary commercial operations but to see that it keeps within sound banking principles — you would see that, as in the case of the Bank of France or the Bank of Germany or the Bank of England, the discoimt rate would be advanced whenever there was any indication that speculation needed to be checked or that the outflow of gold should be stopped or that gold should be drawn into this country. That is the great merit of the central bank, that it stands at the center of affairs, a sheet anchor, a Gibraltar, ready to discount the paper of other institutions if it is sound, but ready to give them an admonitory word to reduce their operations if they are unsound. But even a central bank, as I said of our big reserve banks in New York, would operate under difficulties if this whole system of State banks and other institutions were imposing all its burdens upon the bank without its power to intervene until the instant of the crisis. If these various institutions can be coordinated by offering privileges to induce them to come into the national system, if they can be offered privileges which will be valuable to them, you can super- impose your central banking structure upon this well coordinated system of national banking, and it will be able to act with greater efficiency than it could without it. Upon the question of reserves, there should undoubtedly be some changes of law. But what is the use, as I said before, to change your law and require larger reserves in some institutions, if you can not require them in all, when all institutions lean ultimately upon the great reserve banks of New York, and those banks under the existing system are not even coordinated into a harmonious and self-aiding body? They stand alone until the crisis is upon them, and then under the imminence of absolute ruin they sometimes get together and save the situation for themselves, as they did recently, by sending currency to a premium. Reserves should be undoubtedly increased in some proportion, but that is not the whole solution of the question. Personally, I do not believe in going so far as to prohibit the carrying of some reserves in New York, because New York is the financial center of the country, and inevitably every bank of any standing has a deposit there, and that deposit should be, under any decent and sane banking system, as good as gold. The great Euro})ean banks carry in their reserves great amounts in foreign bills. The Bank of Germany usually has in its reserve a great amount in bills on England, ])rincipally on London, because it is known that a bill on London is convertible anywhere and is worth its par value in gold. So ought bills on New York to be, if her ambition is to be one of the great financial centers of the world. She never can be so long as we nave such a monetary system as we have at ])resent. For a city whose l)anks snsjx'iid currency payments, which sees gold and currency go to a j)r('iiiinin of 4 per cent in case of an emergency, and that j)remium ofi'crcMl for the importation of foreign gold, is as well qualified to contend for the supremacy of the world in financial matters as Rio de Janeiro or Valparaiso. Such an ambition is grotesque under such a system as ours. Bank issues secured by bonds are only a stimulus to inflation. It does not matter how good the bonds are. Bonds are a part of a CURRENCY LEGISIATION. 215 mortgage. A man can loan money on a mortgage and lie knows that he can eventually get his money back. But what (le])ositors in banks want is to get their money l)ack, not eventually, l)ut "sooner." When they put deposits in a bank, what they have a right to depend on and what they want is the certainty of being able to withdraw those deposits again on demand. The fact that the bank has got a lot of good bonds which it can liquidate some time, or has got a lot of good mortgages on its hands — ^l)onds running until 1959 or 1970, perhaps — is of no consequence to those depositors. ^Miat they want is assets that can be converted into cash; and commercial paper, of course, constitutes such a resource. Some of it is coming due each day. And if you had your central bank, you would have paper com- ing due not only at the fixed date from when it was drawn, but j^ou would have the rediscounted paper coming due very soon after it was rediscounted. That is the policy of the Bank of France and of the other continental banks. If the joint-stock banks find that they need a little currency or are hard pressed for reserves, they go up to the Bank of France and rediscount the ])aper they have in hand, and that paper may have already run seventy-five days out of the ninety which it has to run, so that the Bank of France alwaj^s has in its custody paper maturing almost at once. Its note issue, moreover, is backed by a gold reserve of five hundred millions — nearly as large as our Treasury gold resources — so that you have in the central bank a sheet anchor; a safeguard against every possible or conceivable emergenc}^. With their use of those powers, their power of discount of paper brought in b}" the joint-stock banks, without limit upon the note issues of the bank, and without definite reserve requirements, because that is left to the foresight of the bankers at its head, and with this immense gold stock they have a system which is impreg- nable, which nothing could shake except economic collapse of the entire industrial power of the nation. Now, we have in the Treasury gold to the amount of $9()0,()()0.()0{), but it is wasted, it is useless, to a large extent. It is circulating among the public in the form of gold certificates. It is very good money, but there is no doubt that the public would be just as well satisfied with bank notes resting upon an adequate reserve. They would not be as well satisfied with greenbacks, if they understand the question, resting upon a gold reserve, because the Government is not a bank; it lias no quick assets. That is the fundamental weakness of all this talk about the Government doing a banking business. How can it do such a business^ To be sure, we j)iled up some gold there; we provided that in case of emergency the (iovern- ment shall keep solvent by paying out this stock of idle gold. I^ut the Governiiieiit has not any commercial paper coming tlue; it lias not any mortgages of railroads antl steel corporations or even United States Mercantile Marine to sell or hypothecate on the market; it has notliing but its current receipts, and its current expenditures absorb these current receipts. There have been times when we have had a surplus when we needed it, and tiiat surplus has been availed of to help the ])anks and avert trouble. But the real function of a bank is to meet the public tleinaiids for cnuht throut^h its circulating medium and deposits — through a circulating medium secured by gold and also by commercial paper rediscounted at that central institution or these coordinate institutions of which 1 have spoken. 216 CURKENCY LEGISLATION. It is amazing that we approach this problem so slowly, so labori- ously, with such travail. Every other country in the world, practi- cally, has approached a central bank through a system of coordination and" gradual elimination of local bank note issues. France, as you know, founded the Bank of France in the time of the great Napoleon. She had for a time some departmental banks, but the power of issue was taken from them and concentrated in the central bank, which now has its branches in the larger cities of France. Austria-Hungary has her central bank. And while we are comparing our nation with others what shall we say of Russia and Japan in their late war? Did either one of them find it necessary to suspend specie payments? Did the Bank of Russia announce that owing to the great pressure in the money market and the fall of Russian securities on the Paris Bourse they would suspend gold payments? They would probably have had to do it if the Bank of Russia had been secured by the bonds of Russia; but they were secured on the commercial resources of the country, and they were as good as gold. Even little, struggling, new- born Japan tried early in her history to base her circulation on bonds, and national banks sprung up like flowers under the breath of spring all over that land. They were all over Japan, and they put out their notes, great cjuantities of them. But the country was soon flooded with paper, gold left the country, and within a few years the Govern- ment brought in a proposition for creating the present National Bank of Japan and taking the power of issue gradually away from the local banks. Under this system of a central bank even under the strain of poverty, with poorly developed industrial equipment, facing one of the greatest powers of Europe in a contest that tested her to the uttermost, the Bank of Japan went on steadil}^ maintaining specie payments. When it was found that there was some tendency to trouble, they simply floated a proper loan and strengthened their reserves, and kept on maintaining specie payments without even such a provisional suspension of payment as the Bank of France exercised in 1870. Could we do that? It is difiicult to see how we could, mucii as I am interested in the maintenance of the honor and sovereignty of my own ccuntry. Summing up these coT/clusions, I say that the provisions of the bill before you not only provide for a better bank-note system, in itself of vital importance, and which I consider of the very first importance, but it goes beyond that. It goes to the root of the great evils which were developed in our recent crisis, which were the culmination of a bad system blindly carried on, for I do not suppose that until the report of the Comptroller of the Currency was printed after the panic, anybody knew what this tremendous expansion of State and trust com|)aiiy banking resting upon liie fragile reserves of the New York banks was. But we know it now. We know what a lofty supcr- strnclnre of crecHt was built upon that foundation, and we have a bill here which makes it almost impossible hereafter that tliose oper- ations shall go on wit hont being coordinated with the national banking system, and if I had any amendment to suggest to this bill it would be thi.s— that tliere should be some safeguard against excessive loans of deposits which are payable on demand upon negotiable securities; that either the percentage shoidd be restricted of a bank's assets that could be thus loaned, or that the valuation of securities should be bo based n|)(>ii the average valuation of a period of time instead of CURRENCY LEGISLATION. 217 upon the market valuation of the moment; because it is the market vakiation of the moment which has caused this tremendous pyra- michng and specuhition in New York. Speci Lation, in mv judgment, is a legitimate function; but it can be made illegitimate by being carried on wrongfi lly and without justification m existing conditions. What happened in New York under the system of pyramiding loans upon securities witho 't ade- quate reserves was something like this, that a man having 1,000 snares of a stock worth 50 co Id go to a bank and borrow $37,500, and he co- Id then take that $37,500 and divide that up between two or three brokers and by means of what is known as "wash sales" manage to convince the public that the stock w^as going to rise and that it was a good thing to buy. When he had worked it I'p to 75, he would borrow three-fourths of 75, or aroi nd 56, instead of the 37^ he had before. When he had worked it up to 150 he co Id then borrow 112^, where he had originally borrowed only 37i. There are seci.rities on the New York market which have made almost those tremendous strides, and whose market value is made up partly of real value and partly through this indefinite pyramiding of loans. You could stop it, or at least check it if you would simply say that the value of the loans made shall be 75 per cent of the market value upon the average of the pre^io" s three months, in- stead of 75 per cent of the market value of yesterday, which per- haps was 20 points above the market value of the day before and 50 points above the value of the week before. I use these figures because there is a provision in the law of New York that a banking institution can loan upon securities only 75 per cent of their market val^ es. I do not recall that the national banking law makes any prohibition to the effect that you can not loan 100 or 150 per cent, and I think some s; ch provision as I have suggested would tend to check spec; lation and keep it within its legitimate channels — for it has legitimate channels — and to prevent that speci lation which is pure inflation, which robs the people by misleading them, by misrepresenting the value of securities. You wo: Id then pre- vent the growth of this mi shroom structure which inevitably col- lapses, throwing the whole burden upon the unrelated and isolated banking units of New York. This bill takes a long, firm stride in the riglit direction. It coor- dinates the banks with each other. It would tend to prevent unwar- ranted and speculative loans, and bring into the national system the State banks and trust companies which have been able to carr}^ on these speculations witlu)ut restrictions as to reserves, or at least with very inadequate restrictions. I think that is all I have to say now. I would be glad to answer any questions you want to ask. The Chairman. Do any gentlemen of the committee desire to ask questions? Mr. BiTRTON. You would fix, would you, a nuixinuun of the anuiunt that can be loaned upon the Government securities? Mr. CoNANT. A percentage. Mr. Burton. A maximum percentage? Mr. CoNAXT. Yes; I think the national banks of New York have ranged up to 60 per cent of their loans, but their percentage has not been anj'thing like that of the trust companies. The trust com- panies, in fact, are more or less restrained by law from lending on 218 CURRENCY LEGISLATION. commercial paper, because their original purpose was not to accept deposits payable on demand. I would like to put in the record a letter on this subject which I wrote to the Evening Post at the very first outbreak of the panic. The Chairman. Very well. The letter submitted by Mr. Conant was as follows: [The Evening Post, New York, Frida}-, October 25, 1907.] BASIS OF SOUND BANKING. To the Editor of the Evening Post. Sir: Present conditions in the financial world throw light on the declaration of a well-known English authority that "nothing was easier to conduct than the business of a banker, if he would only learn the difference between a mortgage and a bill of exchange." The phrase "bill of exchange," as here used, refers more particularly to domestic l)ills, and is equivalent to our term commercial paper. It is the failure to distinguish between a mortgage and a bill of exchange which is causing many of our present difficulties. The piling up of loans upon p^Tamids of inflated stocks and bonds is due in large degree to the great development of industrial securities in recent years. Such securities do not represent circulating capital, but fixed capital. They are simply obligations, or shares, in a mill, a railway, or mine which represent a permanent investment. They are either mortgages or something which ranks below mortgages. Securities circulate, but the property they represent is fixed. They are not, therefore, in any proper economic sense circulating capital, and are not the best basis for the investment of deposits payable on demand. The true basis of sound banking is commercial paper, because such paper repre- sents circulating capital. In other words, it is the product of purchases of raw materials which are converted within a short time into finished products, whose sale for consimiption affords the means to pay off the paper and thereby closes the transac- tion. When money is borrowed on securities no transaction of this character takes place, and there is no natural and normal date for closing the transaction. Managers of banks and trust companies seek to give the character of circulating capital to secur- ities by advancing money on them subject to repayment at call. This system works admirably in periods of prosperity, but it causes couAoilsion in times of adversity. The owner of a part of a mill, railroad, or mine can not convert the property into cir- culating capital. In his efforts to get rid of his share of it, when he finds that all the banks are curtailing their loans, he is compelled to make great sacrifices or shoulder the losses upon the banks by failing to make good his margins. Undoubtedly, in most cases the banks are foresighted enough to protect themselves by throwing the burden upon the borrower, with the result of continuous crashes in the stock market until stocks fall far below their normal value. Nothing of this kind occurs in dealing with commercial paper. There is, of course, some field for speculation in commercial operations, but it is limited. The losses on commercial paper are calculable, like insurance losses, and are a fraction of 1 per cent per annum. When the merchant finds demand diminishing he diminishes his pur- chases of raw materials and his creation of finished products, thus automatically reduc- ing his demand upon the banks. He is not tied up with a fixed volume of paper running continuously, as are the owners of stocks and bonds. The result is that he meets his obligations as tliey mature, and if the bank can not continue his accom- modation he curtails his output. Never does commercial paper fluctuate from par down to 40 or 50, like even good securities, save in the exceptional case of the insolvency of the maker, and even then there are usually indorsements to which to have recourse. Loans on securities are legitimate within certain limits, but within the last decade or two they have come to constitute altogether too large a i^ercentage of the loans made from depositors' money. On the part of the New York national banks alone loans on collateral increased from §1G2„SG1,654 on October G, 1896, to .f442,210,7G5 on Septem- ber 4, 1906, while connnercial loans increased only from $151,795,029 to $259,840,272. Where stocks and bonds are not the very best and most convertible stock exchange securities, loans upon them are only disguised participations in permanent enterprises. Such participations, in one form or another, nearly wrecked the ( Jerman banks in 1901 and have proved a source of di.saster on many other occasions. It is to be hoped that after the present situation has cleared up, our bankers will return to the sound princi- ple of the Eiigli.sh writer ital needs regulation mucli more (ban bank reserves. During tlie last ten years the ratio of national banking capital to liabilities has declinefl from 19 per cent to alxmt 12 ])er cent. There has been a steady decline in the ratio that the capital bears to the total of the debts of the banks. When I say "capital " I mean capital and surplus, all that belongs to the stockholder. What the stock- holder puts into the bank is not held in money, and should not be. It may go into li((uid assets or it may go into cash, but it is the c.(m- tribution of the stockholder to resources of tJie institution to pro- feet outside creditors; and as those creditors increase as the lia- bilities ()!' the bank increase, the capitalization of the bank ought to incre;is(>. Wv jiavc, indeed, increased the total of banking capital CURRENCY LEGISLATION-. 229 during" the last decade. It has increased from S5UU,U00,U00 to $900,000,000. But all that increase has been taken away from business; all that money, which was intended for the aid of business and industry, has been locked up in Government bonds on account of our curious bank-note system. Right here let me add a word to what Mr. Gage and Mr. Conant said with regard to banks lending on securities. When a bank lends $10,000 on railroad stock it is really investing its own money in a railroad. It is diverting commercial capital, the capital wliich has been saved and put into the bank for the use of merchants and marmfacturers, and gi\"ing it a fixed investment. For instance, suppose I have $10,000 that I would like to use in my business, but I would like to make all that I can out of it. So I buy $10,000 worth of railroad stock and then borrow from my bank $8,000 or $9,000, using the stock as collateral. Now, whose money has gone into the railroad? Certainly, if the bank had not been willing to lend me money on the stock I should not have bought the stock, but would have put my money into my business, where I needed it. I have mentioned now all the financial and currency evils of our system. About two weeks ago, thinking this subject over and not kno\^ing that I was going to appear before you, I wrote a short article entitled "Schemes for currency reforms," which was published in the Journal of Accountancy. I discussed briefly the plan wliich has been introduced by Mr. Aldrich in the Senate for emergency cur- rency, and 1 said with regard to that plan something which I will read to you. Sucli measures do not aim to furnish an elastic currency, one that shall expand in the autumn and contract in the spring, but merely provide for an increased issue of cur- rency in periods of financial stress. * * * Experience has proved that clearing- house certificates backed by commercial assets of banks can safely be relied upon to satisfy the local need for currency in times of panic. It may be well to place legal sanction on this kind of currency, but it is impossible to see why anything more should be attempted. As for Senator Aldrich 's bill, if one of its effects shall be to prevent the issue of clearing-house currency, such as the country used in November and December of 1907, it would leave the banks in a worse plight than they are now. Commercial banks do not make a practice of owning bonds of any kind. These are fixed assets and have no place on the ledger of a commercial bank. If Senator Aldrich's bill should become a law, only a small number of the national banks of this country would be in a position to avail themselves of its privileges. At the very time when merchants most needed help such a law would tend to draw the liquid capital of the country away from business into various forms of long-time investment. It is difiicult to believe that a measure so impotent and so unsound in principle will receive the approval of Congress. Now, 6 per cent is a high rate of interest. You can not go above that in New '^'ork, I believe. It is usury if you do, is it not, Mr. Gage ? Mr. Gage. Not if it is on demand. ]\Ir. Johnson. The Aldrich bill would aid certain gentlemen in New York City who wish to speculate on the stock exchange, for banks can not charge merchants higher than 6 per cent, and they would have to get 7 or 8 per cent before they would dare to put those notes out subject to a 6 per cent tax. Hence such a measure would merely tend to stinmlate unhealthy speculation in Wall street. The bill would lull many people — the majority of people — to sleep on this subject. Mr. George called the Aldrich bill a narcotic, but I am inclined to think it contains the elements of a drunk. Then I considered various plans for asset currency, and I had to admit in this article that it was very difficult to devise an asset 230 CURRENCY LEGISLATION. currency issued by national banks that would be safe. If you have a circulation like that of Canada, where all paper money in circulation is bank notes, it is easy to show that no more bank notes can be put into circulation than are wanted by the people; and that if more are needed, more \\'ill be put into circulation. Notice the two important points. Before you can get elasticity all the paper money in circula- tion must be bank notes, and the banks must have the right to issue more notes than they are able to get out. The authorized issue of the Canadian banks is now about $97,000,000, yet they can not get much over $90,000,000 into circulation. If they should succeed in getting out ninety-six or ninety-seven millions, they would doubtless increase their capital stock, and thereby increase the authorized limit of issue. The Bank of France is authorized to issue notes equal to $1,000, 000, 000, whereas it now has outstanding somewhere around $900,000,000. The Chairman. The law now is that the limit is $1,200,000,000 of our money. Mr. Johnson. The Frenclimen are the people to go to for the truth about finance, and not the Englishmen. I am sorry to say that the English have not learned anytliing about finance since 1797, when they lost their ^\^ts through fear of Napoleon. They were scared to death for fear that the French would get their gold away from them. The British Parliament ordered the Bank of England not to redeem its notes in gold, because they thought Napoleon had gathered together a lot of its notes and had agents over there getting the gold out. They have in some respects a worse financial system than ours. Its one strong feature is the unity created by the Bank of England. Because of the power of that one central institution, in wliich all other banks carry their reserves, a grain of gold safely carries a much heavier mass of credit than is possible under the loose banking system of the United States. Plaving in mind these two propositions, that our currency nmst be saturated with bank notes, and that the authorized issue of banks must exceed the possible issue, I examined the statistics of our mone- tary circidation and found that we currency reformers were iip against a difficult proposition. November 30, 1907, there was in circulation a total of $1,500,000,000 of Government paper money. We had of gold certificates $747,000,000, of silver certificates $472,()()(),000, of United States notes $350,000,000. The total reserve of national banks at that time amounted to $700,000,000— gold, tjold certificates, silver certificates, United States notes, and Treasury notes. Of that, probably S25(),()0(),()0() was in the form of gold coin and bullion and $450, ()()("), ()()() in ])a])er. That leaves about $1,050,000,000 of paper money actually in circulation, in our pockets, in tills of siiop keepers, and in vaults of wState banks. How are we going to saturate our currency with bank notes? We can not do it until somehow we get rid of that paper money. Then 1 wrote as follows: Let us by way of illustration examine tlie measure recommended to Cononds on the market for the market price at the time the bill became a law? Mr. Frame. That is, until there was a strong demand for them at a high price ? Mr. Crawford. Yes, sir. Mr. Frame. Well, as I stated Mr. Powers. Mr. Frame, I am a believer in your views as to raising the price of bonds. Will you permit me to make one or two sugges- tions? Mr. Frame. Yes, sir. Mr. Powers. I believe that the large c{uantity of outstanding bonds, even if you strike out railroad bonds, makes it so that this proposed legislation would not materially raise the price, as you have suggested. Mr. Frame. I think so. Mr. Powers. Let me call your attention to another thing. At the last Congress we allowed other bonds to be deposited as a condition of receiving the money that is in the Treasury. We legalized that de})()sit. I do not know how many of those are used. I saw by the paj)er last night or this morning that there are $240,000,000 of Gov- ernment deposits now in the banks under that act; and nine-tenths of them — and I guess nineteen-twentieths of them — are in other bond deposits. That did not raise the price of those other bonds that have been used by the various banks as security for that money. Mr. Frame. Instead of the market going up in the last three or four months, it has gone down. Mr. Powers. Yes; that is true. And while I do not sa}^ this because I am in favor of the Aldrich bill, I do not believe that any amount of bonds that woidd be used would have any material effect upon the price of them; and I do not believe that the use of some two or three hundred millions of bonds to get Government deposits in the banks, which has been done since we passed that act, has affected the price of bonds at all. 246 CURRENCY LEGISLATION. Mr. Glass. Is not that because we have an extraordinary condi- tion in the coimtr}^ — demorahzation and prostration of business? Mr. Powers. Well, we would do it again. Mr. Glass. Does not that have a depressing effect upon the bonds? Mr. Powers. I do not think it would if that had not been the case. But we are only going to use these bonds, anyhow, when we have an extraordinary condition ; and we are only going to use them once in a great while. It is not like the case of the 2 per cent bonds. They are to be in constant use under the existing banking laws; while bonds to be used under the Aldrich bill might not be called for for years, and hence it would not have that effect. I only make that as a suggestion; and hence I have not placed much confidence in the idea that this would have any particular effect in raising the price of bonds. Mr. Gillespie. It would not have any depressing effect on them, would it? Mr. Powers. I do not think it would amount to a tiling. The number of the bonds is so large that I do not believe it would have any particular effect. Mr. Gillespie. It looks to me as though if you enlarge the use of a thing you enlarge the demand for it and therefore you "boost" the price. ' Mr. Powers. How much do you think it would increase the price? I^Ir. Gillespie. To whatever extent you were to enlarge the demand for the bonds; to that extent. The Chairman. Mr. Hill has just informed me that a large bond dealer told liim that he did not tliink that out of the four billions of bonds, including railroads and municipals, more than a bilHon would be available ; and five hundred million is provided for. It would be a very easy thing, if you could get 5 per cent on the bonds, and you wanted to start into this business, to go and organize a bank and take out tliis circulation, and then start a trust company across the street to put the notes out, take out the money as reserve, and then loan six times as much as the amount of your notes wMcli 3^ou had already created upon bonds upon whicli you were getting 5 per cent; and then you would find yourself afloat on the world of wild-cat inflation. Mr. Glass. There are but two railroads in the entire South whose bonds could be used under the Aldricli bill ; and I doubt if there are many municipahties in the South whoso bonds could be used. Mr. Powers. I do not know of a single municipality in New Eng- land whose bonds can not be used. ^Ir. Glass. I doubt if there are many in the South that could be, Mr. Powers. Oh, in the South. Mr. Glass. For the reason that the constitutions of many of the Southern States place a Umitation of 18 per cent on the assessed value on the issue of bonds. I had a communication from the city council of the city of Richmond the other day asking that when the Aldrich bill comes into the House an effort be made to amend that feature of it so as to allow the bonds of the city of Richmond to be available for this purpose. The constitution of Virginia allows an issue up to 18 per cent of the assessed valuation. The Aldrich bill restricts it to 10 per cent. So that I doubt if there are many munic- ipalities in the South whose bonds would be available; and there CURRENCY LEGISLATION, 247 are but two railroads in the entire limits of the South whose bonds would be available under the Aldrich bill. Mr. Burton. What two railroads are those? Mr. Glass. The Louisville and Nashville and the Illinois Central. Mr. Hill. Mr. Chairman, may I make just a single suggestion on this })oint? The Chairman. Yes. Mr. Hill. I do not wish to interfere. Mr. H. Leroy Kandall, president of one of the largest savings banks in New England, was here last week; and he told me that his experience was that the moment a bond was passed by the legislature of Connecticut, making it a lawful investment for our savings banks, it increased the price of that bond 10 per cent. Mr. Powers. It always increases the price of every bond to have it passed as an investment for savings banks. The Chairman. Taking them on the whole? Mr. Hill. Yes; that was his experience. Mr. Powers. Generally all good bonds are investments for savings banks, are they not ? Mr. Hill. Oh, no; not in New^ England. Mr. Powers. I mean municipal bonds. Mr. Hill. They must be specified by the legislature. They can not invest in any bonds except those that the legislature previously acts on. Mr. Powers. That is not so in ]\lassachusetts or Maine. In those States if they are good bonds they are all right. However, that is a mere matter for future speculation as to what efl^ect it would have on these bonds. We have a general law stating what bonds shall be used, and you have to bring yourself within the rule in order to sell them. For investments for savings banks they always sell them that way, and all our bonds are intended to l)e brought within that rule. Mr. Frame. After a panic is over — and it generally runs, perhaps, for two or three months — the currency becomes plethoric and the banks wish to reduce it. It has always been so in every panic that I have ever passed tlu-ough. Then, if there is a 6-per-cent tax upon it, it certainly will be reduced voluntarilj^, because there will be no profit in it; and therefore the currency that comes out under this bill is a measure of relief under pressure. Then the bank that desires to reduce its circulation simply has to deposit legal tenders with the Treasury Department or, imder the Aldrich bill, national-bank notes. That process of the deposit of those notes with the Treasury Depart- ment and the taking up the securities, if it is done simultaneously by all of the banks that have gotten out this extraordinary currency, reduces the volume of currency in the country to exactly its normal level — the same level that existed before the trouble ensued. If the banks return their owm national-bank-note currency, the Treasury Department simply takes it and cancels it. and it is not reissued. If other bank notes are deposited, redemptions are made from lawful money deposited under present law. The law of 1890, permitting the Treasury to pay out laA\'ful money deposited for retirement of bank notes, diverts such funds and should be repealed. The plea that trouble would ensue because of a shortage of legal- reserve money is not well taken. Late reports show cash reserves 248 CURRENCY LEGISLATION. held b}^ banks approximate $700,000,000; total legal-reserve money in the country, about $2,350,000,000. If it is in legal-tender notes, then the notes that are outstanding can be sent in for redemption by any bank that may be short in its reserve at any time. If there is any trouble about reserves, the bank that holds the national-bank notes will simply send them to the Department at Wasliington and receive the legal tender in return. Their reserve is fixed. But no bank ^\"ill take up its securities and return this circulation as long as there is a.nj trouble. Just as quickly as the trouble is over — and, as I say, it is generally over in two or three months — it is retired, and you are back in a normal condition, and then you have no inflation. A low-rate tax would keep tliis currency out just as long as there was any profit in it. It is human nature. If there Avas an addition of 1 per cent per month to the tax after the currency had been out for three months, I do not think it would be objectionable at all; because if there were any of the western or southern regions where the rates of interest were very high, and j^ou wanted it retired, that would compel its retirement just as quickly as they could not make any money out of it. Or you could have a date fixed, although I do not like the fixed date, or the Comptroller of the Currency might have power to call the notes in and insist that they be retired, or find out the reason why. As far as the great, wealthy regions are concerned, it would be done very, very quickly. The last notes that would come in, probably, would be from tlie small western country towns where the rate of interest is very high; at least, it strikes me that way. I think, gentlemen, that I ought not to take any more of your time, because I have, as clearly as I can, explained what to my mind is simplicity itself. We have a normal condition of circulation under our present arrangement. When trouble ensues the Aldrich bill Erovides cash, under a loan, with securities that most of the banks ave on hand and a tax sufficiently high not to bring it out unless it is necessary. Mr. Glass. Is it a fact, Mr. Frame, that most of the banks have these bonds on hand? Is it not a fact that most of the bonds are held by a few banks in the large money centers? Mr. Frame. That is exactly where the trouble ensues. It is not in the country towns. Mr. Glass. Your idea, then, is that the Aldrich bill is intended to cure trouble in the large centers and incidentally prevent trouble in the balance of the country? Mr. Frame. Incidentally in the countrv, as the country banks hold $384,000,000 of bonds; and in the State of Wisconsin SO banks out of 120 have the bonds. Mr. Glass. Are you prepared to say to what extent that $300,000,000 of bonds held by the covmtrv l)anks is available under the Aldrich bill? Air. Frame. I say that if the Aldrich bill should pass, if the quality of the bonds is not wliat it might be for use under the Aldrich bill, the banks would gradually shift them from the kind that the}^ had into the kind that were rccpiired. Therefore they would be always pi^epared to get this extra currency in order to stop panic and keep the wheels of commerce in motion; the tax would immediateh^ retire it when the emergency was past, because there would be no profit in it after the trouble blew over and the reaction had commenced. CURRENCY LEGISLATION. 249 P Mr. Pujo. ^lay I ask you a question, Mr. Frame l We are con- sidering the Fowler bill now by sections. Are you familiar in a general way with its provisions ? Mr. Frame. I am sorr}' to say that as I did not see it until just a day or two ago, and as I have been exceedingly busy I have not had time to go through it carefully; and I do not like to talk about a subject that I do not at least feel confident in. Therefore I do not believe I ought to make any comments on the Fowler ])ill, which on a casual reading seems somewhat revolutionary. Mr. Pujo. Have you given any thought to and are you willing to express 3^our opinion on the advisability of the banks of this country guaranteeing deposits ? Mr. Frame. 1 have issued an address on that subject, and I am most emphatically opposed to tlie guaranteeing of bank deposits. Mr. Gillespie. What is your strongest objection? Mr. Frame. My strongest objection is that I do not care to have a banker across the street take a l()an that I turn down at a higher rate of interest than I would take it for, simply because he is willing to take the risk. To draw^ business such a banker will pay a higher rate of interest than I am willing to pay on deposits. Men who are nmning that kind of banks are in evidence all over the country even now. If 1 turned the loan down and he took it, and he should sus- pend or fail, I woidd be compelled to pay for the liquidation of the deposits in his bank. I am conservative; he is not. I say that there is no law which you can put upon the statute books that will ever reojulate the l)anks so that they will not do piratical things. They will bid for deposits in all sorts of ways. Mr. Pujo. Suppose they are limited to 2 per cent ? Mr. Frame. It does not make any difference if they are; they will give you exchange for nothing; they will do any number of things that you can not name in a bill. The Chairman. That would l)e helpful to commerce, would ii not, if the}' gave you exchange at a low rate? Mr. Frame. It would be helpful to commerce, but it would be death to the fellows doing business; and I tliink that both of them ought to prosper. I do not think it is possible to put any law based upon equity upon the statute books that will compel a man running a conservative institution to indorse for the incompetency, the dis- honesty, the moral hazard of the other man, nor to indorse for the high financiers, whose reckless acts precipitated the 1907 panic and left in New York City alone $94,000,000 of unpaid deposits to-day. And yet these troubles occurred und(>r rigid banldng laws. Perfection is simply imattainable. Insuring deposits is an entirely different proposition from that of lire insurance; and even there, in tho cases of the fires in Chicago, Boston, Baltimore, and San Francisco each wdped out any munber of insurance companies that were doing fairly well under normal conditions. As far as an occasional depression is concerned, even though you may have a guaranty' fiuid, let me refer to the safety-fund act of New York in 1829 and onward, under wluch there was a safety fund accunudated of 3 per cent, which proved a failure. The banks ran along without .serious trouble, although thej had a panic in 1834-35 and, I believe, in 1837, but they survived until 1841. In 1837, if that safety-fund sj^stem was an absolute success. 250 CURRENCY LEGISLATION. why did the State of Xew York adopt the free banking system right where the safety-fund system was in operation? The Chairmax. Do vou know how it was? Do vou not know why they did it ? ' Mr. Frame. I do not. The Chairman. ^^Tiy, a man went into court on a deposit that was put there to secure notes, and he took the case to the Supreme Court on the ground that this fimd, according to the statute, apphed to the deposits. It was never intended for the deposits at ah; but the Supreme Court construed the 3 per cent fund as apphcable not only to the notes but to the deposits, and of course it was an inadequate amount. Mr. Frame. Was not that in 1840, Mr. Fowler? The Chairman. That accounts for the whole change in the system. Mr. Frame. No: but the New York banking bill was passed in 1837, and I think the troubles ensued in 1840. The Chairman. That was the time of the transition, and that was the reason for it. The whole thing was misconstrued. It was put in for a guaranty of notes: and this man, claiming that when the bank failed, he, as a depositor, was entitled to his share of it, took the case to the Supreme .Court and won it. ]\Ir. Frame. And in 1841 or 1842, I think it was, that guaranty which the court decided was good for deposits as well as for notes was repealed; and even in 1845 there was not enough money in the fund to the extent of $1,000,000 to liquidate the outstanding liabilities. The State even borrowed money, $600,000, I believe, and paid 6 per cent interest on it, for the purpose of liquidating those liabilities and those bonds. I think the whole thing was not finallv liquidated until 1865. I think I started on a point, and I do not believe I finished it, did I? That point was that the safety-fund law did not prevent trouble; it did not prevent panics, as they had several of them ; and that there- fore a law of that kind does not prevent trouble absolutely, nor, I think, even approximately. But the great and serious objection with me is that I am not willing to indorse for the other fellow, because you can not regulate him; it is absolutely impossible. Mr. McCreary. Mr. Frame, speaking right on that line, uncler the Fowler bill there would be a system of, say, 20 or 25 zones. In those zones there would be 8 men who would be elected from the (hfl'erent banks in the zones; and there would be a deputy comptroller who would control things in that zone and require the men doing business in that zone to do it conservatively and do it safely. How would that plan remedy the objection you have as to wild-cat banking and speculation ? Mr. Gillespie. And each bank is to lose 10 per cent? Mr. McCreary. And each bank is liable for 10 per cent of the losses that there may be from any baidv in the zone getting into trouble. Mr. Frame. I think that if you will concentrate that right where it hes now, you will get more effective supervision than j^ou will by any 10 or 15 or 20 different sets of men who will look after matters of that kind. Mr. McCreary. That is what you would advocate, although you do not think it is possible just now — a central bank, a centralization in the zones? CURRENCY LEGISLATION. 251 Mr. Frame. That is for the redemption in different locaHties? 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