CHAPTER LXXV
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THE MONETARY SITUATION AND ITS REMEDIES.[3]
Footnote 3:
An address to the West Virginia Banking Association at their 13th Anniversary Meeting, at Elkins, West Virginia, June 19, 1906, by Henry Clews.
The rapid growth of our population, the great activity of all our industries, the general prosperity of the country, apart from the terrible calamity at San Francisco, and the immense speculation going on in land and mining ventures, especially in the West, are the underlying causes of the severe monetary stringency that New York has lately experienced. These influences have kept money to a much larger extent than usual active in the interior and prevented its concentration not only in New York and the other Eastern monetary centres, but at the Western centres.
Chicago in particular found that money, instead of returning there from the interior in good volume, as it usually does in January, February, and March, continued this year to be sent to the interior by the banks there at an average rate of $12,000,000 a month during these three months. This movement was not so much owing to the land and mining boom as to the immense absorption of money in the various manufacturing, mercantile, and other expanding business interests all over the West and South. So great was, and still is, the activity in these directions that speculation in grain, provisions, and stocks has been more neglected in the West than for several years, as the narrowness of the markets there has shown.
To show more precisely the effect on the money markets of this unusually great speculative and industrial activity it is only necessary to say that, during this first quarter of the year 1906, the Chicago banks steadily and heavily lost in deposits, while their loans kept increasing. A comparison of the condition of the national banks in that city on April 6th, as reported to the Comptroller of the Currency, with their condition at the date of their previous report on January 29th, showed an increase in their loans of $8,625,237 (or 4.11 per cent) and a decrease in their deposits of $6,773,490 (or 2.11 per cent) and a decrease in cash resources of $14,628,960, or 10.38 per cent. These figures explain why money was so scarce in New York. The West had none to send us, although there is more money in circulation than ever before. If we go back to the condition of the same Chicago banks on March 14th, 1905, and compare it with their report referred to, we still find that their deposits decreased $8,687,117 and their cash resources $7,970,318, while their loans increased $1,599,774; and in their reduced cash resources the Chicago banks reflected the condition of the banks in all the other large cities of the West, Northwest, and Southwest. There has been a rapidly rising volume of trade and land and mining speculation there for more than a year, and enormous activity in new industrial enterprises. In the Southwest, particularly, the growth of banking has been not only unprecedented but enormous. I include in this designation the States of Missouri, Arkansas, Louisiana, Texas, and Kansas and the Territories of Oklahoma, Indian, New Mexico, and Arizona. The last decade has witnessed in this section of our country more extensive and rapid material development than was ever before seen anywhere, either in the United States or elsewhere, and this expansion in banking was in response to that material development, and therefore had a legitimate foundation in business requirements. American spirit and enterprise, and Western push, overcame all obstacles in spreading civilization and creating trade, especially in the new settlements.
In the five years ending with 1900, 101 new national and other banking institutions were established in these nine States and Territories—with a consequent increase of $94,500,000 in individual deposits and $150,300,000 in aggregate resources, and in the next five years ending with 1905 no fewer than 1,415 new banks and banking institutions were added to the number—a resulting increase of $73,400,000 in capital and surplus, $383,750,000 in individual deposits and $670,350,000 in aggregate resources. Thus, in ten years, there was an increase of 1,516 in the number of banks, of $137,000,000 in capital and surplus, of which $79,000,000 was surplus, of $478,000,000 in individual deposits, and of $820,750,000 in aggregate resources.
This enormous banking development reflected and stimulated the enormous development of the country, and aided trade fully as much as trade helped the banks. The one kept pace with the other, and marvelous progress in both was the result; and this progress continues, and will continue indefinitely long under the stimulus of the rapidly increasing population of that still sparsely settled section.
This banking development is of incalculable benefit, both locally and generally, for its influence is far-reaching. The drain of money from the outlying districts, including New York, to move the crops, is reduced as banking facilities in the West and South increase.
In the South, during the same period, there has also been very great commercial and banking development, with the banks and trade going hand in hand to help each other, as in the Southwest. The South was never before so active and prosperous; and, rapidly as it is progressing, it will go on prospering with unabated vigor and enterprise, for it has entered upon a new era of prosperity and immense development of its material resources awaits it. In manufacturing and mining, as well as agriculture, immense opportunities are open to it; and before long the natural increase of its population will be largely added to by the white immigration that it needs. So the South has a bright and magnificent future.
This vast industrial and mercantile activity—this general business enterprise, this land and mining speculation, or boom, has extended, in various degrees, all over the United States, and the influence it has had on the money market in large cities, and particularly in New York, was only a natural and easily foreseen result. It has produced a corresponding activity in money, because of the greater demand for its use; and the real estate speculation, the vastest we have to deal with, is still increasing.
The boom is almost entirely in land and mostly in vacant plots, or lots, suitable for building purposes; but there is also a very active speculation in improved property, and much speculative building. The amount of money practically locked up in this land speculation is much larger than is generally supposed.
Statistics of 29 of the largest cities of the United States show that in the month of May they issued permits for the construction of 13,712 new buildings, to cost $55,074,761, against only 12,036 in May, 1905, to cost $50,791,738, an increase of 8 per cent, and a similar increase was shown in each preceding month of 1906. The May increase was greatest in cities remote from the Atlantic Coast; in Portland, Oregon, it was 309 per cent; in Tacoma, 111 per cent; in Seattle, 30 per cent. But the San Francisco catastrophe was evidently the main cause of the large increase in Portland and Tacoma. Yet the increase in Omaha was 75 per cent, in St. Paul 49 per cent, in Duluth 110 per cent, in Louisville 50 per cent, in New Orleans 47 per cent, and in Chicago 39 per cent. These figures, dry as they may seem, are eloquent in their suggestiveness of the extent of the demand for money from this one source, the land and building boom.
Gold and silver mining speculation, too, last year began to assume the dimensions of a boom in Nevada, and all the old metal and mineral mining camps, and many new ones in other States, are, like the Lake Michigan copper regions, scenes of active speculation in properties, as well as busy with mining, and hosts of speculators are their own bankers, carrying large amounts of currency in their pockets.
The money that usually returns to the money centers is thus widely scattered and too busily employed to return. So we have to deal with a period of prosperity and industrial activity that is something more than normal. But—without referring to the heavy drain of cash for the relief of San Francisco, which was offset by gold imports—although money was scarce in New York, owing to this enormous activity and general prosperity that kept it moving from hand to hand, it was not scarce enough to justify the excessively high rates we often witness on the Stock Exchange. These were serious and hurtful, and to guard against such vicissitudes in our money market every member of the Stock Exchange and every banker and bank officer should use his influence.
How far the Chamber of Commerce Committee on the Reform of the Currency will succeed in providing remedies for the monetary situation remains to be seen. But from the twenty-seven questions it has sent to bankers and others it is apparent that it contemplates no fundamental change in our currency system. Inferentially, it will not interfere with United States legal tender notes, nor with United States bonds as a basis for the circulation of the national banks. Yet both bases are indefensible on sound economic principles. The issue of greenbacks was merely a war measure, and intended to serve only a temporary purpose; instead of which we have made it permanent, so keeping the Government in the banking business with its war currency system.
There can be no question as to the false bottom on which the national bank currency rests; for paper, that is, paper money, should not be secured by, or redeemed in paper, even when that paper is as indisputably good as United States bonds. All our paper money ought to be based on readily convertible assets and redeemable in gold. Bonds, even United States bonds, by which national bank notes are now secured, are only evidences of debt, and the time will come when these will be liquidated, and the sooner the better.
The committee probably thinks that the existing order of things, notwithstanding its fundamental errors, is too deeply rooted and strongly fortified to be materially changed without danger of the remedy proving worse than the disease. It consequently favors more national bank currency on the present basis. Branch banks and rediscounting for small banks by large banks are also favored. The committee’s questions indicate, however, that it favors the abolition of the Sub-Treasury system, and to that result it should resolutely bend its energies. At present the Sub-Treasuries are practically banks, like the old United States Bank at Philadelphia, with the important difference against them that all the money they take in remains locked up in their vaults till paid out on Treasury drafts. The evil effect on the money market, and
## particularly on Wall Street, of thus withholding money from circulation
in periods of stringency has been too often felt. It was more than usually conspicuous and severe during the late tight money ordeal, owing to the Treasury receipts very largely exceeding its disbursements. This greatly aggravated the scarcity of money in New York, due to other causes, and resulted, in Wall Street, in the rates for call loans ranging at times, within the last six months, with rapid and eccentric fluctuations, from 15 to 30 per cent, and on one occasion touching 125 per cent. We have here a phenomenon entirely distinct from ordinary monetary conditions.
These extremely high and highly fluctuating rates are, it is true, peculiar to the New York Stock Exchange, but they are none the less a great evil, and they acquire national and even international importance from the fact that New York is the financial center of the country and the New York Stock Exchange the barometer of financial values for the whole United States.
However much our commanding position may in other respects fit New York to be the world’s financial center, it cannot aspire to and secure that position of power so long as it is the scene of these violent fluctuations in the rates of interest for call loans on the Stock Exchange. Measures should therefore be taken not only to prevent them, but to make their recurrence impossible; and how this can be best and most efficiently accomplished is a matter for very serious consideration.
That it can be accomplished is evident from the entire absence of any such violent rate oscillations in the money markets of Europe. There the rates of interest fluctuate slowly within a reasonably narrow range, generally between 3 and 5 per cent, the extremes being 1 or 2 above, or below, these figures. Such unreasonable eruptions in the money market as we have sometimes seen in the loan crowd of the New York Stock Exchange were never seen, and would be impossible, in London, Paris, Berlin, or any other European capital. Why, then, should they ever occur, or be possible here?
In response to questions propounded by the Chamber of Commerce Committee I would say that, as the Sub-Treasury system is a disturbing factor in the money market, provision should be made by Congress for the regular deposit in national banks of surplus Government money above its regular working balance of fifty millions, the banks to pay interest at 2 per cent per annum thereon.
Bank notes, in my opinion, are a form of bank obligation the same in principle as bank deposits, payable on demand, and these notes, as the most convenient form of credit, should be released as much as possible from restrictions not necessary to secure their safety, acceptability, and redemption in gold, or United States legal tender notes, for so long as the latter may be kept outstanding.
In seeking increased flexibility for our currency I would not suggest anything that would impair the value of United States bonds as a basis of circulation; but it deserves consideration whether new currency might not be issued by moderately increasing, above the par of the bonds but not above their average market value, the amount of notes to be secured by them. Then, too, why should not national banks be authorized to issue a fixed proportion of circulating notes upon their general resources, these to be secured by a guaranty fund? To induce the retirement of these notes when not needed, owing to money being superabundant at low rates, this asset circulation could be made liable to a graduated tax. The proportion of notes to capital that should be allowed, and the amount of the tax, are matters upon which bankers differ, but I favor strict moderation in both. This asset currency, under moderate restrictions, for use under ordinary conditions, would be far preferable to any emergency circulation, ISSUED UNDER A HIGH TAX, although Secretary Shaw recommended it in his report for 1905.
As the taxes collected upon the circulation of national banks from 1864 to the end of June, 1905, amounted to $96,220,997, and the failed banks, during that period, had outstanding only $17,295,748 of notes, and the dividends paid on their claims averaged 77.95 per cent, it follows, at the same ratable proportion of loss, that the deficiency on account of their notes would have been only $3,813,712, or 22.05 per cent of their total circulation. So in the light of this experience I see no great risk in a guaranty fund, consisting of the taxes paid upon circulation, nor do I see why it would not be sufficient to redeem all the notes of failed banks.
I would make the asset currency a first lien upon the assets of the issuing banks, and allow the banks to redeem their notes at appointed redemption places in the large cities. This would save the trouble and delay of sending them to Washington, and by facilitating redemptions when money was easy, give more ebb and flow to the currency and tend to prevent excessive speculation in times when there is a glut of money. Under the Canadian banking system there are several central redemption cities for bank notes; but I would not, as is the case in Canada, limit the right to issue notes to banks of not less capital than $500,000. There is safety in numbers, in regard to banks as well as other matters. Then, too, it would be well to make all the Sub-Treasuries in the country useful as national bank note redemption points, because it would contribute to the elasticity of the currency in the same way that it does in Canada, and doubtless Congress would favor such a measure.
The proposition to establish a new bank in Wall Street with $50,000,000, or even more, capital, or to increase the capital of an existing bank to that extent, to serve the purposes of Stock Exchange borrowers, and regulate rates of interest, after the manner of the Bank of England, is deserving of no consideration whatever. It would merely excite and provoke the jealousy and opposition of other banking institutions, and create a sort of monopoly with special privileges, without securing the end in view. A Bank of Banks is not what we want, nor do we want a revival of the old United States Bank.
Such a bank as the Bank of England, or the Bank of France, could not be created here, either in a day or a generation, for those time-honored institutions are the growth of ages. They are very much older than any of the other banks there; and, under the control of their respective governments, they have grown up with their countries and become practically, although not by ownership, government institutions. Hence their prestige and power, and the impossibility of other banks superseding them.
It may, however, deserve consideration whether the New York Clearing House might not exert power in regulating rates of interest similar to that exercised by the Bank of England, providing the banks belonging to it would unite to give it that power; and is there any reason why they should not? Even without any formal or concentrated action in this direction, outside of the Clearing House Committee, it could appoint a committee to name every week, or oftener when necessary, as the Bank of England does, a minimum rate of interest on call loans and discounts. It could also fix a maximum rate for each. This need not be compulsory; but even only as a recommendation it would have a powerful moral effect, and the Wall Street banks, if they approved of the innovation, would conform to it. The Clearing House could, indeed, after the formal approval of this regulation by its members, enforce its observance under penalties, if deemed necessary. In this alone, in my opinion, a practical remedy would be found for the high rate evil on the Stock Exchange.
But, at the same time, greater elasticity could be given to our national bank currency if Congress would amend the law so as to permit of currency being issued against specified bank assets, subject to the approval of the Comptroller of the Currency. This is a feature of the banking system of other countries, which has always worked very well and to the satisfaction of all interests; and what our currency urgently needs is greater elasticity.
Strictly speaking, according to economic principles, we cannot expect a perfect currency, with all the resiliency and elasticity possible in a currency, so long as bonds instead of gold are used as the basis of our bank circulation. Yet for security the bonds are, under present conditions, just as good as gold; and there would be more elasticity in the bank circulation based upon them if the restrictions imposed upon their redemption by the Act of 1882, which are now unnecessary, were removed. Indeed, the inability to promptly retire bank notes is one of the worst faults of our system, and Congress should repeal the restrictions without delay. If this obstacle in the way of resiliency were removed, and the unlimited retirement of bank notes permitted, we may rest assured that free expansion, when demanded, would quickly follow curtailment, and this ebb and flow of the currency would obviously be an elastic movement.
As it is, there is a great waste of banking power in our treatment of national bank notes and reserves. We have $544,765,959 of national bank notes, and only $337,130,321 of United States legal tender notes, and, setting gold aside, the redemption of the former in the latter is obviously absurd and inconsistent with sound finance and good banking. We see in the present system this $544,765,959 of banking capital absorbed and represented by non-reserve currency. The capital is perfectly safe, but it is locked out of any other use, and rendered inefficient for any other purpose. This calls for a remedy. The percentage of reserves to loans in national banks has decreased from more than 20 per cent in 1898 to less than 15 per cent. Hence the bank reserves require to be increased.
The law relating to the redemption of national bank notes in United States notes, or greenbacks, was passed when the greenbacks very largely exceeded the bank notes in amount, but the reversal of these conditions reminds us that the tail is now wagging the dog. This alone makes it clear that the law should be amended.
But beyond all this we should open our money market more to the rest of the world by establishing a new factor, which would always afford prompt relief in times of stringency, by giving us cable transfers of gold, instead of gold shipments, and of itself prevent abnormally high rates. Through this medium we could, instantly, practically draw gold from Europe whenever wanted, and Europe could do the same from us, when needed there. I refer to the establishment of an International Gold Transfer System, or Clearing House, to supersede and dispense with what I may call the old-fashioned gold see-saw. Gold in circulation is doing good work, but gold see-sawing across the ocean is going to waste. The custom of shipping gold from one country to another, in response to the ups and downs of the market rates for foreign exchange, not only reminds me of the forward-and-back movement in a quadrille, but suggests that, as the precious metal is rendered practically useless while in transit, it should not be used in a dance of that kind across the ocean. The subject may not seem to be very important, but it really is so, for “tall oaks from little acorns grow”; and it is surprising that in the march of modern improvement this method of settling international balances has not been superseded by a shorter, quicker, and cheaper cut to transatlantic adjustments. Bankers, in both hemispheres, are absurdly behind this progressive and electric age, in transporting gold from the New World to the Old, and vice versa, to adjust balances between them, whenever the rates of exchange show a profit in the transaction. That they could profitably dispense with it is obvious, as they could easily establish this transfer system, this international clearing house for gold, at very small expense. Thus the risk, and loss of time, involved in the old-fashioned method would be eliminated, while the new arrangement, being under their own control, would beyond peradventure serve every necessary purpose of the shippers, combined with perfect safety.
The disadvantage of shipping boxes or kegs of gold to and fro between America and Europe is apparent when we consider that it is a time-wasting see-saw performance, which involves the expense of packing, cartage, freightage, insurance, and loss of interest while in transit, and still greater loss due to abrasion consequent on sea transportation, to say nothing of bankers’ commissions, and risk of partial or entire loss by robbery, accident, or marine disaster; ignoring, moreover, the restraints it imposes upon our foreign trade.
All these disadvantages could be obviated and this handicap upon our commerce removed by a mutual-interest arrangement, between the leading banks in the United States and Europe, to deposit a sufficiently large amount of gold on each side of the Atlantic, and issue international clearing-house certificates and draw bills of exchange against the deposits. This gold could be counted as part of their reserve, if in their own vaults; or the Bank of England, in London, and the United States Sub-Treasury in Wall Street, could be used as the gold depositaries. We have a clearing house for bank checks in each of the large cities, and one also for the transactions of the New York Stock Exchange. London, too, has its bank clearing house. Why, then, should the clearing house system not be extended to international transfers of gold, so as to make them possible at any moment by cable-telegraph instead of the slow process of six-days transfers? In this way our international dealings would be quickened and extended and our financial and commercial relations become more intimate.
There is no good reason why we should unnecessarily treat gold as we do, when we can save time, money, and risk by keeping the metal where it is, and issuing certificates of deposit against it, and the use and transfer of which would serve as well as gold shipments.
The present custom becomes a ridiculous “chasse” across the Atlantic, when we see the same gold shipped to Europe, then shipped back to America within a few days after reaching its destination, without being unpacked, owing to sudden intervening changes in the rates of exchange, making it profitable for the former gold exporting country to import the metal. Such wasteful shilly-shally procedure would be likely to excite mirth in opera bouffe, but bankers who ship gold are very serious about it, and seem to be without enough perception of the ludicrous to see anything funny in its coming and going, although they feel the shoe pinch in its costliness in both time and money. As the world’s gold production increases the urgent need of this over-sea change will become more and more conspicuous, and its adoption will accord with the generally progressive spirit and methods of our telegraphic and telephonic age.
Had such an international gold clearing house existed the sagacious but unprecedented action of the Secretary of the Treasury, to relieve the money market by making deposits, as secured loans, in certain banks, to encourage and cover their prospective gold importations from Europe, the same to be returned on the arrival of the gold, would have been unnecessary. While this expedient has well served a temporary purpose, it is not to be relied upon as a permanent source of relief during monetary stress, and it involves a stretch of authority under the law that is open to grave objection. But, as it happened, the Secretary’s
## action, which was taken just before the San Francisco disaster occurred,
proved particularly fortunate, and probably prevented a very serious aggravation of the stringency in the money market, owing to the heavy remittances to California. It was a piece of good luck that seemed almost providential, and the end justified the means. But it should always be regarded as only a fortuitous circumstance and temporary expedient, not as a permanent source of relief; and it emphasizes our need of a new international gold transfer system. Moreover, the benefit Europe would derive from it would be equal to our own.
The Secretary, under the circumstances, acted wisely in also increasing the Treasury deposits in the national banks, while the Government’s receipts were largely in excess of its disbursements, so as to offset, as far as possible, this preponderance of receipts, and lessen the drain of money into the Sub-Treasuries. But this method of relief is, too, only a temporary expedient, to remedy the evils of the Sub-Treasury system. While the Sub-Treasury system lasts Congress should authorize the Secretary to deposit customs, as well as internal revenue receipts, in the national bank depositaries, in time of stringency, when the Government’s receipts exceed its disbursements, and it has more than a sufficient working balance. The Government should, as a compensation to it, require the banks to pay interest at, say, two and one-half or three per cent per annum on such deposits, these not to exceed, in amount, 25 per cent of their paid-up and unimpaired capital, and to be returnable on demand, but without requiring these special deposits to be secured. They should, however, be made a first lien upon the assets of the banks.
If the changes above suggested were made, I am sanguine that they would prove to be remedies for the evils and disadvantages under which we now labor, and so increase the stability of our money market and improve and fortify the machinery of the whole monetary system, while giving more elasticity to the currency.
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