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EBPTEMBHR 6, 1012
The Commoner;
along nearly all linos o business and is neces
garily attended with great business depression
and industrai distress.
Preventing a bank panic may bo compara
tively an easy matter the means for doing this
aro now provided in the Aldrich-Vreeland law
but no means have yet been discovered to pre
vent an economic panic.
The so-called panic of 1907 was a bank panic
only there was no economic disturbance and
after the excitement ended business of all kinds
went along just as it had before. In fact, this
country has repeatedly been on the verge of
a bank panic that did not materialize, when
there was nothing whatever to indicate even an
approach to an economic disturbance.
It is not correct to say that panics, if roferenco
is thereby made to these economic disturbances,
occur in this country with greater frequency
than in other countries.
The French government has recognized their
periodic occurrence by creating a commission
whose especial duty it is to study international
economic affairs for the purpose of taking note
of occurrences which may indicate a coming
crisis.
This commission has very recently announced
the opinion that these disturbances occur with
considerable regularity and that the next one
is due between the year 1914 and 1917. From
Germany comes also a note of warning. The
commission which supervises financial affairs in
that country has recently addressed a letter to
the executive committee of the Bourse which
corresponds to our New York Stock Exchange,
in which it is urged to check the exaggerated
activity in certain stock dealings, and the presi
dent of its largest bank has declared Tecently
that in his opinion the Bourse shows signs of
a coming collapse.
Now these may be false prophets wo will
hope they are but it is an undeniable fact that
these economic upheavals have occurred in this
country at almost regular Intervals of about
twenty years.
A CENTRAL BANK WILL INTENSIFY PANIC
It would be well if wo had in this country, as
in France, a disinterested commission who
would study these matters and by timely notice
would prepare us for such occurrances and lead
to the adoption of 'measures which might lighten
the effects of the catastrophe. A great central
bank however, whose managers and clients
would be the chief factors in the activities lead
ing to the conditions being forced to a head,
could not be depended upon for such an emer
gency. On the contrary, with the extraordinary
power given it to inflate the currency a tempta
tion could not be resisted at such a timeit
would servo only to intensify the situation. '
BANK PANICS FREQUENT
It will be admitted that bank panics and se
vere monetary stringencies do occur more fre
quently in the United States than in other coun
tries, but the reason for this can be easily dis
cerned. The immense volume of securities issued and
floated in the money market offers a situation
of constant peril. It bank loans were confined
to commercial and industrial paper there would
be no such risks as now exists. That class of
operations has periodic periods of settlement
and the capital used in them is automatically
returned to the channels from which it is taken.
Just as naturally as harvest time succeeds seed
time, payment follows borrowing.
The availability, however, of loans against
securities for the employment of idle money sup
plies an attraction,' for banks which they can
not resist. Many of these securities are first
class in every respect and in ordinary times
supply a means of quick convertibility into
money which is not possessed by commercial
paper.
But while commercial and industrial paper
liquidate themselves, the capacity of tho capi
tal supply to absorb these' 'securities can not b
foreseen, and wheri'this supply fails, as It soifle
times does, a condition Is at once producedof
severe; monetary stringency Pleading to a bank
. panict The stock! exchange collapse and securi
ties are thrown in large volume upon the market
wittuino buyers for themnr ' Lu Act
?, THE ADDtoSVB,!,!; J
it is constantly denied that thecgntral insti
tution created byhAhirfch jpJUls-gt hank.
Ilpj reclaimed tojjfce merely,, an aocfrtionof
.fo.r a inutu&hfcurpose and Jnjprejft,, rtr
jApx-clos iavafnygatlon iwili sbi tk&ital
jiot only a batiks with all. the needed power to
do business as such, but that under these propo
sitions it Is clothed with greater powor and
authority over othor banks than has over beforp
been given any bank In this country and so far v
as I know of In tho world.
Tho fact of Its separate capitalization de
prives it of all semblance to a mutual associa
tion. It is truo that every bank possessing tho
required capital may become a stockholder, but
to do this it must put up money. This domands
an increase of capital in many casos, or olso
tho bank must do business with its actlvo capi
tal impaired.
I think I have shown coriclusivcly in my
papers that no largo number of the interior or
country banks will find it to their intorest to
take stock in the reserve bank.
Granting, however, that all may do so, In
what possible manner can their comparatively
small holdings participate In its management?
The creature once created will be suporlor to
its makers. Once organized as a living force
it would bo an independent body operating
through its officers with full power and author
ity to do whatever in their arbitrary judg
ment they saw fit to do.
In its dealings with its members this bank
may discount direct what aro called acceptances
or prime bills which would not be possessed by
interior banks. All othor loans must como
through tho branches, and these are limited in
ordinary times to paper having not more than
twenty-eight days to run. The branches would
bo under the control of the central authority,
and the paper offered them for discount or re
discount may be accepted or declined just as tho
policy of the bank may dictate.
Tho bank is given polico power over its mem
bers, which powor has never before been given
to any bank. The intention seems to bo to con
fer upon tho bank all the supervisory powers
now exercised by tho comptroller of tho cur
rency, and these powers are so great that it can
easily be seen it would bo practically exercised
over all banks whether members or not.
INDEPENDENT BANKING REFORM
In my opinion anything which is done to give
greater elasticity to our banking transactions
should bo along the same independent lines
which now marks our banking system.
A reforiri in loaning operations 'to be of real
value should be one which will give actual
fluidity to bona fide good commercial paper. It
should not be in tho power of any set of men
to dictate and set bounds to such operations.
If the money1 supply justifies, nothing except
the Interest rate equalized to all banks
should impede its quick convertibility into cash.
A bank whoso business calls for some expan
sion should have a certain market for its bona
fide business paper and not be subject to tho
delay and the final arbitrary decision of some
governing body. If its paper is of unquestioned
character it should feel the same assurance of
its being prbmptly cashed as it has with a good
bank draft which it mails to' its' correspondent.
The only restrictions should be tho statutory
ones applying to the volume of rediscounts for
any one bank and excess loans to corporations
and individuals.
A PLibf FOR SEPARATE. RESERVE
'"" ASSOCIATIONS
The real,. weakness in our banking system is
tho inelastic character of the money reserves
required by law to bo maintained and to which
I directed 'attention in papers published many
years ago ,nd urged then dome legislation to
permit of their use to a certain extent.
This weakness is admitted on all sides and is
being used as one of the levers to propel tho
Aldrich scheme.
The effective use of a portion of these re
serves, concentrated in some manner for tho
purpose, shpplios a ready means of removing
this weakriess and giving to our banking system
a much needed steadiness and support.
This may be accomplished by means of mu
tual associations in opoclfied districts, in which
all the banks of a district should be members.
The arguments in favor of such associations aro
so numerous" rthat I will not undertake to detail
them; thojqwill'bo apparent to everyone who
will inveattgafe'.tbo plan. -
I will only endeavor In a -general way to sub
mit tbe.oHtHpenOf what I would propose aa a
substitute fathe Aldrich plan..,
dv? i. CAPITAL' t
The capltSf ioasessed by tfipjnks,, forming a
reserve atioctftlon would bd,Jample protection
to the pumiA and no- additional1, capital should
be required, ,..
The plan of reform is designed toassigt and
relieve banks not to oppress them by requiring
increased capital. Each association, howovor,
should bo duly incorporated, Just aa clearing
houses now are, and should bo compoiiod of not
loss than ton banks having an aggrogate unim
paired capital of $5,000,000.
Tho country should bo divided into district
somewhat in tho mannor provided In tho Aid
rich bill for loan associations and in tho Ald-rlch-Vrccland
bill for currency associations.
Tho wishes of tho hanks should ho consulted
as far as possible in defining tho territorial
limits of each association, but when organized,
all the banks In a district should bo Umltod' to
membership In that association.
2. MANAGEMENT
Each rcscrvo association should olect a board
of directors and In Its by-laws provide for tho
officers by whom Its business shall bo trans
acted. .,.
It should choose a city to bo its resorvo con
tor and Its principal placo of business. Tho
board of directors, in addition to Its othor. pffi
cers, should name a managing comrujtfao taken
from the banks In tho rcscrvo city or from
banks contiguous thoroto.
The managing commltteo should employ a
manager and such othor employes as may bo
required.
This commlttoe should pass upon all paper
offorod for discount or as socurlty for discounts
and should establish tho Intorest rate to .bo
charged, and should raise or lower this rato
from time to time as tho stato of the resorvo
fund and circumstances justified or demanded it.
Tho manager should give such bond as tho
committee might require Ho should havo
charge of the funds, securities and accounts of
the association under tho supervision of tho
managing committee.
3. DEPOSITS
The business of tho association should bo
transacted upon tho deposits of its members
with its manager.
Theso deposits with tho resorvo association
Bhould be counted by each bank as so much of
its cash reserve required by law to bo kept on
hand.
As an illustration of what the deposits may
amount to, wo will tako the stato of Nebraska
for a district.
The total cash on hand in tho stato and na
tional banks of Nebraska by the latest roports
for 1912 was $1G,608,749. One-half of this
which might bo easily spared would create a
fund of $8,304,375.
The deposits with the separate reserve as
sociations need not, however, bo confined to tho
actual cash shown in tho bank reports they
may also include balances due from other banks.
Tho total cash with balances due from resorvo
agents was $50,484,927. One-half of this would
bo $28,242,463, a sum more than double tho
national bank circulation of Nebraska.
This ample sum for any emergency could bo
still further increased by $20,000,000 if tho
entire rcservo fund now with resorvo agents
Bhould bo deposited in tho separate reserve as
sociation. These figures show conclusively that tho de
posits of a reserve district would supply funds
sufficient for tho needs of that district under
almost all circumstances.
Tho volume shown for Nebraska is so Icltkg
that two resorvo districts could be easily main- j
talncd, with ample funds In each district to
meet all ordinary requirements.
4. CIRCULATION , j
There should bo printed and held by tho
comptroller of tho currency for eacli separato
reserve association bank notes of the usual
form, character and denominations.
Upon tho receipt by the comptroller of a certi
ficate executed by tho proper officers of a re
serve association setting forth that good com
mercial paper, as per schedule attached to each
application, was held by tho association, sepa
rate and distinct from Its other assets as se
curity for tho circulation desirod," In addition
to the guaranty of the same by all the banks
forming tho association, the comptroller nhall
deliver circulation to the extent of 80 'per- cent
of the' aggregate amount of plcdgodVaper.
The circulation so received' should bo subject
to .a tax of t per cent per anntxni, payable 'to
tho treasurer of the United States in the same
manner that national banks are flow required
to pay 'on, thW circulation, ' " ' ,
The reserve, associations should note re
quired,, to hdld a cash reserve a'gjtinsf this 'cir
culation ercept the 5 per cent redemption fund,
.'(Continued on Pago 10.) ' ' '
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