CHAPTER LXXV.
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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