General Discussion of a Central Bank vs. Regional Banks
Title
Creator
Identifier
Date
Description
Source
Language
Text
Before considering the bill in detail we will now rtake up a general discussion of a central bank vs. regional banks.This country is confronted with a problem in currency reform, unique in the history of banking and unprecedented in the character and number of complications to be dealt with. The only instance in history comparable to ours is that of the German empire. Following the consolidation of the German states, banking and currency reform was undertaken by the Empire, the Act under which the Reichsbank was incorporated having been promulgated March 14, 1875, the gold standard having been definitely established by the Coinage Act of July 1873. At that date there were 31 quasi-public banks of issue operating under Governmental charters, issued by twenty-two German states or municipalities. As in the case of England, where the Bank of England has gradually absorbed the right of note issue, leaving but a negligible volume of notes of other banks in circulation, so in Germany the Reichsbank, by the provisions of the Acyt of 1875, has gradually been able to substitute its own notes in place of the notes of over thirty original banks of issue. The contrast with conditions in this country is marked. Germany had established the gold standard by the Coinage Act, and consolidated its paper money issues into one form of note, supported by the credit of the Reichsbank. Gold and the notes of the Reichsbank, with negligible exceptions, constitute the currency of the nation. The United States has 7,500 banks of issue, operating under Federal charter, twenty thousand odd State banking and credit institutions conducting their business under divergent laws of of forty-eight different States, and seven forms of circulating medium: National bank notes, United States gold certificates, United States silver certificates, United States notes, treasury notes, gold coins and silver coins.While the situation in Germany was vastly more simple than the one we have to meet in this country, yet we are considering further complicating iour system through the introduction of a proposed complex and untried system of regional banks, whose faults can plainly be seen and whose points of advantage are not apparent, instead of forming a central bank upon principles the soundness of which have been thoroughly established. The principles of a central bank, both in theory and in practice, have been proved beyond question as being capable of upholding the commercial transactions of a nation. It can be seen, both with the eyes of theory and practice, that a central bank established in the United States would successfully meet every banking and currency problem that we have before us, whereas there are grave doubts about the successful operation of a system of regional banks in respect to many necessary functions that a public utility bank should possess.In considering the detail of the Owen bill, it will be found that, in general, a possibility of abuse of political power in the case of regional banks is very great and that the one man power placed in the hands of the Secretary of the Treasury is appalling. In the case of a central bank, there would be no necessity of subjecting the business interests of the country,- which include all interests,- either to conflicting political policies or the personal opinions of an incompetent Secretary of the Treasury.Along the lines of banking practice, one central bank with branches could be used more effectively to bring about currency reform and banking reform, than a series of regional banks, eight or twelve in number. The points of differentiation are chiefly along the following lines:
(2) Equitable, stable, and uniform discount rates.
(3) Management, and sectional or partisan differences.
(4) Uniform note issues.
(5) The gold movement.
(6) The credit of the Government.
(7) The fiscal agency.
(8) Refunding operations.
(9) Clearing functions and domestic exchange.
(1) Mobilization of Reserves.“Mobility” means “the quality or state of being movable, with extreme fluidity,” and, as applied to banking reserves, it means the ability to loan money in one part of the country that is not needed in some other part of the country, with speed, without friction, and without expense. Mobility of reserves exists in a central bank with branches, to a greater degree of perfection than it is possible to conceive in any other system. Reserves that may be held by any and all branches are still the reserves of a central bank. They may be shipped from the largest city to the smallest city, at distant ends of the country, and if held within the control of branches of the central bank, they count as reserve for the central bank. It is possible, therefore, to loan money at any branch of a central bank, no matter how small that branch may be, or where situated in the country in relation to tother branches, and have it measure in its effect upon the reserve against the total reserves of the central bank, instead of against a small division of such total as would be represented in a regional bank. The percentage of effect in such a transaction, therefore, would be vastly less in the case of a central bank than in the case of regional banks. In the United States we have a number of districts clearly marked in their nature as to the kind of business. All of the banks in certain districts, such as those which grow corn, wheat and cotton, are obliged to borrow money at the same time of the year. A number of other districts have money to loan during this same period. Under our present system, series of banks in one district, say the cotton district, borrow from a series of banks in another district, say the New York district, involving vast transfers of actual cash. Under a regional banking system some of the demands of the cotton district would be consolidated into the regional bank (all of them could not be because the bank would not be large enough), and the only difference between the present system and the regional bank system in this connection would lie in reducing the number of channels of borrowing from the present number of borrowing banks in the cotton district to the same number of banks under the regional system, less those which were able to obtain their requirements from the regional bank, which itself would then be obliged to borrow from the New York district regional bank, exactly as every other borrowing institution in the same district might be doing from its New York correspondent. In a central banking system, notes that might be issued at its New Orleans, Galveston, Houston, Dallas, Atlanta, and other branches in the South, would be based upon all of the reserves of a central bank wherever held, and a perfection of mobility would be obtained not possible under our present system and not possible under a regional bank system. The power of the Federal reserve board to force the New York regional bank to loan to the New Orleans regional bank would not, and could not, place the reserves of the New York regional bank behind the note issues of the New Orleans regional bank. There would be, therefore, no greater mobilization of reserves under a regional bank system than there is today, even though the number of banks in the New Orleans district which borrowed from the New York district would be reduced.In connection with the mobilization of reserves, and preliminary to its successful operation, we must have ceoncentration of reserves. In a central bank, such concentration is again perfect. In a regional system such as has been proposed, it not only lacks perfection, but it actually extends the separation, for we are proposing to increase our system of three central reserve cities, which has been wanting in concentration, to eight or twelve central reserve cities in effect. The Owen bill is attempting to further centralize by greater decentralizaytion.Harmony exists in the minds of practical bankers and economists upon the necessity of an effective assembling of the lawful money reserves of all of the National banks, and the creation of an institution or institutions for this purpose which can be made available as reserve dpepositary for State banking institutions, upon the passage of State enabling Acts involving a minimum modification of State banking laws. Heretofore, credit strains and premiums for currency or gold have been distinguished by the inevitable hoarding process, which has added to the distress by requiring a further curtailment of credit. Analyses of these occurrences indicate a sharp difference, both in character and extent, of such a tendency in this country and in Germany and France. In the United States, during 1907, 1893 and 1894, and 1873, hoarding of gold and currency was conducted on a large scale by bankers and banking institutions and was accomplished, first, by the withdrawal of reserve deposits from other banks, and, second, by requiring a contraction of loans and discounts. A certain amount of withdrawal of gold and currency was effected by individuals, but this was insignificant as compared with the instant withdrawal, under stress, of reserve money by banking institutions. This phenomenon abroad has been quite the reverse in characteristics. Individuals withdraw money from the banks,- generally ignorant people of small means,- and lock it up in their homes. In this country the strain of such a process is unevenly distributed among the 28,000 institutions. Fear controls the action of the banker, and his disposition is to save himself at all hazards, with regard for the welfare of his neighbor or his competitor. His portfolio contains notes and bills which are not available for new credits, and, at the period when he should be able to negotiate his bills and use his reserves, he requires payment of his bills and increases his reserves. In Germany, where a certain hoarding process has been noticed at intervals for the past two years, the phenomenon is quite different. The Reichsbank is able to increase its discount account, meet demands for currency by increased circulation, and protect its store of gold, at least temporarily, by the judicious use of a discount rate which it makes effective in all parts of the empire. The banks of Germany which depend upon the Reichsbank in time of strain, are able to discount bills with that institution, and have a strong incentive to co-operate with the policy of the bank in protecting their own and its credit and reserve position. In this country, we cannot hope by a stroke of the pen to bring about the character of co-operation with a central bank, such as exists in Germany, and, to a considerable extent, in England. The 20,000 State institutions cannot at once be brought into co-operation with such new system as is established. State institutions are, however, so largely dependent today y upon the National system,- the National banks being their chief depositaries reserve depositaries,- that sound currency legislation which will strengthen the position of the National banks will in turn enable the National banks to carry the load which is now imposed upon them by the State institutions, and which will continue for a long period under whatever system is adopted. No system of regional banks will prevent competition for gold and currency in time of credit strain, as effectively as may be done by a central bank. With eight or twelve regional institutions, each section will seek the protection of its own district and the members of that district as distinguished from any other section and its members. Had there been eight regional banks in 1907, it is inevitable that the powers of a central board of control would have been exercised to effect a readjustment of reserves between the regional banks by enforced rediscounts, and the very act on the part of the Federal board of enforcing such rediscounts would have accentuated the rivalry between these sections for the accumulation of reserves.It must be borne in mind what actually happened in 1907 in order to understand why such bhoarding would unquestionably have occured in the case of regional banks. No hoarding was done by the banks of New York City, as is so commonly believed. Instead, such banks not alone shipped currency to to their banking correspondents, represented by the amount of money that such correspondnets had on deposit in New York, but they added to such deposits millions of dollars in loans, in order to accommodate the West and South. They reduced their reserves through shipments to about one-half of the percentage that the law required them to maintain. What was done with this money that was shipped into the country? Was it used to carry on business? No; it found its way into the vaults of the banks in the West and South, until their reserves were built up to from 40% to 50%. It seems to be quite popular to attribute all this hoarding to New York City, but the actual facts,- and they may be proved by reference to the Comptroller’s report showing the reserves held by the Western and Southern banks at that time,- show that the hoarding was not in New York City but in the country and smaller reserve cities city banks of the United States. If bankers were so frightened that they felt it necessary to build up their reserves, even asking for currency against loans in order to do so, knowing that such requests must of necessity increase the stringency, but hoping that they might be able to save themselves even if all the rest of the country were forced into bankruptcy, how can we expect that they are going to view a condition of stringency which may appear in their regional bank which carries a part of their reserves in time of stress? Will not they present regional reserve notes for gold and lawful money as rapidly as they can obtain them, and build up their own cash reserves as quickly as possible? Would not the anxiety by increased if the Federal reserve board, in order to alleviate such condition, even suggested that bankers carry notes issued by the Federal reserve banks as part of their cash reserve? What bank would want such notes in its reserve under such conditions?Now, a point for your consideration. Under our present system bankers may withdraw every dollar that they have with their reserve agent and carry it in cash in their own vaults. New York banks have been criticized on the floor of this Senate for not paying out such deposits on demand, and yet we are deliberately contemplating the forming of a system of regional banks in which the banks must deposit reserves that they are told before their deposit they cannot withdraw. Of what possible value are reserves of that kind that cannot be used, placed with a regional bank in a district where all members may wish to borrow at the same time? In a large institution such as a central bank, where the reserves held by every branch counted for all, there would never be any question as to its standing or its ability to meet the requirements of member banks. In other words, it would be far more valuable to member banks to be obliged to keep a portion of their reserve in such central bank, knowing that every other National bank in every part of the country were also required to keep a portion of its reserve in the central bank, than to be able to draw it out; because it would have the advantage of being able to vborrow against the reserves of every district in the country that were not being used in that district; whereas in a regional bank system no such condition could exist, even on a compulsory discount basis. The defects of the regional system are admitted on the face of the Owen bill. If this country is so vast in territory and its interests so varied in character as to require regional institutions to meet local conditions, why then require that they must be linked together through the exercise of arbitrary powers which must be exercised in conflicet with economic conditions? One institution holding all the reserves will make every dollar of reserve money the property of every section, available to every member, affording protection at all times to all the members, whether lodged in the vaults of the branch in San Francisco, the branch in New York, or the main institution in Washington.(2) Equitable, Stable and Uniform Discount Rates. When the Reichsbank recently reduced its rate from 6% to 5-1/2%, that rate became effective to every one of the 70,000 customers of the bank in every part of the German empire. The Bank of France has maintained unchanged a discount rate of 3% for as long a period as seven years. The United States has no discount market, 28,000 different rates, as many usury laws as there arre States, as many penalties as there are usury laws, and a range of rates extending from a condition where money is unloanable to a maximum of over 100% per annum, notwithdstanding the fact that this country has the largest store of gold, the greatest natural resources, the largest power of production, and the largest volume of banking capital of any nation of the world. The resources of our banking system are about $25,000,000,000. Our 28,000 banks support the largest credit structure known in history. We are now attempting by the enactment of a bill, which is not even supported by a majority of the Senate Committee on Banking and Currency and which it is proposed shall be enacted by a majority of the majority in the Senate, who shall be required to sit in the Senate chamber until eleven o’clock every night, to so readjust the fundamental conditions upon which this great credit establishment has grown, as to bring about uniform rates of interest. It cannot be done by the bill proposed either safely or economically.Without referring to the shifting and withdrawal of redeposited reserves required by the terms of the Owen bill, and assuming that that prodigious task can be accomplished without convulsion in the period of time allowed, how may it be expected that the surplus funds in the regional bank of the community where there exists a surplus of bank credits, may be made available to the regional institution in the district where there is a deficit of banking credits, by the natural economic law of supply and demand. So far as the regional insitutions are concerned, those in sections where there is a continual shortage of credit will alsways be borrowers; those in sections where there is a surplus of banking credit will always be seeking outlets for the surplus. If it is claimed that by the regional system the National banks of the district where credit is short will still be able to borrow from their correspondents, how may this be done without imposing upon the banks of that district the necessity of carrying balances at unprofitable rates with reserve correspondents just as heretofore, and thereby impairing the earning power of the country banks? And, on the other hand, how shall the reserve bank in the district with the plethora of money employ its funds other than by the purchase of bills in the open market, thereby bringing about an undue and uneconomic depression of discount rates? It is difficult to see, under the terms of the Owen bill, how the country bank is benefitted by having its reserves at home, in a regional institution, if it must still maintain a balance with its Chicago or New York correspondent for purposes of discount. Certainly such a condition would not exert an influence towards uniformity or stability of interest rates throughout the different sections of the country. The difference between the lending capacity of the creditor sections of the country and the borrowing needs of the debtor sections will necessarily fall upon the regional banks of the respective districts, and must be adjusted by the exercise of the rediscount function between the regional banks, thereby again introducing an uneconomic operation, likely to cause sectional difference of opinion, abuse of power and distrust of management. With all the reserves in one institution, the credit of that institution may be directed, through its branches, towards those sections where credit is needed without the intervention of arbitrary power. It may be claimed that the regional bank of New York, having a surplus, will welcome the opportunity to rediscount bill for the regional bank of New Orleans. How may this process be developed? Who shall fix the rates? Does this bill intend that every time a difference of opinion arises between New Orleans and New York, a hearing in arbitration shall take place in Washington,- and who are the men who will hear and arbitrate these differences? May their time not be devoted to arbitration exclusively? And how may uniform rates be brought about by mandate or regulation of a board of control? InIn contradistinction to the regional plan proposed, how simple would be the problem with a central bank. Twenty per cent. of the capital and surplus of the National banks of the country amounts to about $275,000,000. A rate of discount can be established with due regard to conditions and to the extent to which transfers of reserves, Government deposits, and the general fund is being affected, which will allow discounts to approximate the maximum seasonal fluctuation caused by the harvesting and movement of the crops, which has been estimated at $300,000,000. A central bank, by establishing a rate with regard to these factors, would automatically meet the fluctuation at the season when required, and as to its base or normal rate through an increase or decrease, would control the extent to which all member banks would rediscount. As the demands increased in any locality or as to any individual member, the rate would automatically increase to the extent that the demand was met. With no distinguishing mark upon the reserve money in a central bank, no question could arise respecting the extent to which any locality was impairing the reserves of the bank with reference to the needs of any other locality. No group of banks in one city, by large borrowings, could so affect the rate in that locality as to impose penalties upon a more conservatively managed institution which had been a more moderate borrower, for they would under the central bank bill have to pay a higher rate of interest as they increased the proportion of their loans to capital. No one great institution overshadowing a number of smaller institutions in one locality could ever impose penalties in the way of increased discount rates upon its less powerful competitors or neighbors. Furthermore, those institutions whose credit was so high as to be able to borrow in the cheapest market would be able to rediscount paper throughout the natural channels of rediscount in different sections of the country so long as it was profitable to do so, at rates below the rate fixed by the bank. We cannot expect for many years to bring about uniform, stable, or low rates of interest throughout this country. We can, however, establish an institution which, over a long period of years, will effect a gradual redistribution of credit and banking reserves, so that both uniformity and stability of rates may come about by the natural operation of economic law. Such uniformity and stability must be based, first, upon the elimination of competition for bank reserves in times of strainl, second, upon a discount market based upon a single reserve reservoir; third, upon the creation of an institution of sufficient power and of such singleness of purpose that it may exercise the same influence over international exchange as is now exercised by the three great central banks of Europe, and the central banks of all of the principal industrial countries of the world. A graduated increase in the discount rate on excess discounts over a normal uniform rate upon a minimum volume of discounts, will apply a brake upon expansion by the borrower where it will be effective, and assist in bringing about both stablility and uniformity, and no such influence can be exercised either by arbitrary power or by the imposition of a tax upon earnings which go to the Government and in which the respective borrowers will have but a trifling, if any, interest.(3) Management, and Sectional or Partisan Differences. Harmoneyy of management directed towards a single purpose is essential to cope with the vast problems and the readjustment of our currency and monetary laws. May we expect that this is possible of accomplishment with twelve boards of directors, partisan to their districts, who may never meet together for exchange of views, and who will be subject to the exercise of arbitrary powers by a Government board? Is not this plan contrary to all human experience in the management of Government or private affairs? How may this system develop, in this country of keen political partisanship, where each party grasps every advantage with its reach to secure the dominant position, or maintain it once secured? May it be expected that a board of control, upon which sit officers of the Government whose appointments are partisan and political, which is subject in many important respects to the direction or influence of the officers of the Government, to be free from political influence and from discrimination, particularly having regard to the political complexion of the different sections of the country?The first and essential protection against partisanship must be a long enough term of office to remove appointees from the influences of patronage. Those managing district offices must be responsible to a board of this character, free from political or sectional influences, and not responsible to a local constituency or clientele which may be influenced by political or sectional prejudices, rivalries or competitions. With one President having the power to appoint a majority of a board of control during one term of office, and with one or more members of the Board members of his official family or subject to their direction, it is never impossible that the powers exercised by that board may be used for political or partisan purposes. In the present temper of the people of this country, how would such a board resist the pressure for rediscounts from a section of the country which had been guilty of over-speculation if the section including Wall Street had resources available? Can it be expected that the distribution of the funds of the Government throughout twelve regional banks can be effected without discord? Such a system as is proposed instantly interjects sectionalism and partisanship. A board of management responsible directly to Congress, appointed for long terms, themselves appointing their local management, would necessarily be free from such influences, the monies of the Government would be assembled in one institution, no questions of sectionalism or partisanship could arise as to their distribution, and the credit operations of the institution would more surely be directed along economic lines. The very introduction of the idea of local ownership and management of regional banks implies sectional rivalry. The introduction of a board of control to regulate the relations between locally owned and managed regional banks, admits the weakness of the regional plan and throws doubt upon its effective character.(4) Uniform Note Issues. Here agiain the weakness of the regional bank system appears upon the face of the bill. A credit instrument to circulate freely among the people must be free from doubt as to its goodness and as to the ability of the obligor to redeem it in gold. Two regional institutions may not necessarily be of equal credit strentgth. Twelve institutions will certainly vary considerably in their strength and resources. Our National bank notes have a uniform value by reason of the Government bond security. Notes secured by paper will vary in quality according to the quality of the security and the percentage of gold reserve. In order that this vicious regional bank scheme may be launched and the impediment of variable credit be removed, the United States Government, for a consideration, is adding its obligation to the notes. This aspect of the Owen bill requires separate discussion. The practical features of the plan as to regional banks may, however, be distinguished from the possibilities under a central bank plan in a number of important respects. The relation between volume of discounts and volume of note issues cannot be controlled by a tax upon the notes, which tax is paid out of the earnings of the bank, when those earnings go to the Government or even when they are applied to the earnings of the member banks. Inasmuch as the volume of the issue of notes by a central bank or regional banks will depend upon the operation of the discount account, it becomes imperative that the board of control shall exercise such a measure of control of the discount rate as will enable it to check undue note expansion in any section. How may that be effected without again interfering exercisin arbitrary powers which are an unwarranted interference with economic laws of supply and demand? A graduated rate of discount will begin to apply a check in each locality as the tendency develops. If that becomes ineffective, the normal or base rate (that is, the advertised bank rate) can then be raised, the effect of which will be to direct the interchange of credit between the sections of the country without necessarily affecting the volume of discounts of a central bank. Such a process, which is comparable to that which occurs in Germany, would hardly be possible under the regional bank plan. There are, in fact, possibilities of note inflation in sections of the country where unusual demands for currency arise, which, under the proposed plan, would annually require to be met by the exercise of the objectionable arbitrary powers.(5) The Gold Movement. Currency legislation is being undertaken in this country at a time when, for economic reasons, the world has witnessed an unparalleled competition for gold. The German bank has added $100,000,000. to its holdings the last year. The French bank has expanded its note issues and limited the amount of its gold payments, in order to conserve its gold holdijngs. The burden of readjustment of the gold supply has largely fallen upon England, where a free gold market is maintained, and our gold supply in this country has only been protected to the degree that it has during the past two years by the prevalence of unusually high rates of interest. The market for gold in this country is absolutely uncontrlolled, save by economic law. May not the proposed legislation have such an influence upon our store of gold as to weaken our position rather than strengthen it, and possibly cause large exportations? This is such an important matter that we must not lead ourselves into a false position blindly. There can be no doubt but that eight or twelve regional banks cannot act as effectively to control our gold supply as a central bank. It would not seem to be a question for argument; it is so apparent. This being true, the next consideration is whether a system of regional banks would better our present position or weaken it. There are many reasons to believe that it might weaken it materially. Any change in the law which makes it necessary for our banking system as a whole to maintain reserves in gold of any smaller percentage than that which now applies to the whole system, will necessarily result in lower interest rates, expansion, higher rates of exchange, and gold exports. It has been variously estimated that foreign investments in our securities amount to from four to six billions of dollars. The enforced repurchase of these securities would impose a strain upon our credit system of unparalleled importance. We have just enacted a law reducing the tariff upon imports by nearly 40%. A sharp decline in our balance of trade, brought about by a great enlargement of our imports, would likewise require the export of gold. A considerable reduction in the activity of business throughout the country may release credits and reduce rates to such an extent that the rate of interest will no longer afford protection to our gold reserves. It is important that the institution or institutions to be created shall be able to exercise an effective influence upon the international movement of gold and to conduct international operations, either through its own agencies or through the agency of its members and correspondents, which will be substantially equal to that exercised by the great central banks of Europe. By the terms of the Owen bill, the eight or twelve regional banks may each establish agencies without number defined, in any and all foreign countries, and without uniformity of purpose or action. Without the consolidation of their foreign credit operations it is difficult to conceive how the influence requiered to be exercised could possibly be brought about, and in the case of regional banks of varying financial strength, having different demands from member banks, any method that would result in their consolidation seems beyond comprehension. Those who created the Owen bill evidently recognized this fact, for they have not made the slightest attempt to bring together the foreign operations of the regional banks, but have left them to take care of themselves, so to speak, apparently hoping that by some mysterious means a way might be found out of the difficulty. Is it not better to face this problem before it is too late? Can this country afford to do otherwise? It is not only perfectly clear theoretically that a central bank would serve to protect our gold supply, but actual practice has proved beyond question that it would do so. It may well be that the bank of the region where most of our foreign operations are conducted will be able to exercise a predominating influence in that class of business, but should this be true, it would always be handicapped by the operations of the others regional banks which would often be working against it. May it not also develop that its ability to defer exports of goold will be impaired by demands made upon the other eleven institutions which it does not control, or, on the other hand, that in the import of gold under conditions requiring its purchase abroad, the cost of the operation may all be borne by the only institution which is able to effect such purchases? If that is not the case, the cost of such operations must once more be arbitrarily enforced by the exercise of mandatory powers which are contrary to economic law and which will give rise to distrust and criticism. Are we to create a system where any one of twelve reservoirs of gold is free to conduct international exchange operations, without co-operation or unity of purpose? If so, let us abandon the idea that this necessary object of monetary legislation is accomplished under the provisions of the Owen bill. One institution with a branch in one or more or in each of the leading countries of Europe, as necessity develops, conducting its dealings on uniform principles and with a single purpose, carrying its accounts with foreign banks under one control, is necessary for the protection of our country’s store of gold. It cannot be denied by argument based on theory or practice, and if the Owen bill is passed there is every reason to believe that instead of strengthening our position in the foreign financial markets, it will weaken it to the point of disaster. The failure or mere rumor of insolvency of any regional bank would blast our credit throughout Europe almost beyond recovery and might result in calling forth exports of gold such as the world has never seen. We are playing with fire in considering this great national experiment. Credit is the greatest asset of nations, just as it is of individuals. If its credit is good, a country may rise up from the depths of destruction by earthquake or conflagration to greater heights than ever before, but if its credit is lost, neither magnificent cities nor vast resources can prevent suffering and degradation to its people.(6) The Credit of the Government. The issue of paper money, bearing the obligation of the Government, must be examined in its historical and economic aspects, and, further, with regard to the protection of the credit of the Government itself. Discussing only the latter features of this subject, what are the possibilities under the Owen–Glass bill of difficulty or disaster as contrasted with the accepted plan common to all the great European nations, of a bank note issue under Government regulation, but without the Government obligation. Should this country become involved in a foreign war, a great economic disturbance, or, what is more possible, should our credit situation be subjected to the disturbing influences of a great conflict between foreign nations, how may the demand obligations of the Government created by the Owen bill affect the credit of our Government?The bill provides that the notes shall be redeemable in gold, on demand, at the Treasury Department of the United States, or in goold or lawful money at any Federal reserve bank. The bill permits the Federal reserve bank to authorize member banks to use Federal reserve notes or notes of the National banks as reserves. Under these conditions, any great economic disturbance in this country, or any world-wide disturbance of credit which might react upon this country’s credit establishment, involves a danger to the credit of the Government, so long as the Government’s obligation is attached to the notes, to the extent, in fact, that a suspension of the reserve requirements of the regional banks as permitted by the bill might involve a suspension of specie payments by the United States Government. A great European war, necessitating huge expenditures, would raise rates of interest in foreign countries that would react in turn upon our banking system, requiring the exercise of every possible measure, first, to retain our store of gold; second, to the extent that it became impaired, to enable the regional banks to pay their notes in lawful money; third, to enable the Government to redeem its lawful paper money in gold. Will a system of regional banks, which is the instrument for issuing untiold millions of Government obligations, be able to protect the Government in such an emergency, and is it not the duty of Congress to see that any legislatiojn now enacted shall afford every means which can be devised to that end? A drain upon the gold of the country in such emergency would be due to the necessary repurchase of foreign investments, to the interruption of our foreign commerce and the disturbance of the balance of international trade, to the floating of foreign loans in this market, to the withdrawal of foreign bank credits now extended to this country, and to the imposition upon our own credit establishment of the burden of financing trade which is now largely carried by England. Gold, in this emergency, would be withdrawn through the presentation of Federal reserve notes at the regional banks, so long as they were able to furnish gold in payment. When unable to furnish gold, presumably they would exercise their right to pay in lawful money. The demand for gold would thereby be transferred to the United States, by the preesentation of the lawful money. This process might necessitate the suspension of the reserve requirements as to the regional banks throughout the country. The ability of the Government to pay gold would be limited to $150,000,000 now held in its trust fund reserve, and its ability to obtain gold from the regional banks. By what process might the Government redeem its notes in gold if the regional banks had suspended their reserve requirements and the Government were forced to rely upon its own ability to purchase gold by the use of its own obligations? The markets of Europe would be closed. Our gold supply at home would be subject to influences largely corresponding to those which now arise in this country in time of panic. We will have possibly 20,000 State institutions, who, influenced by the strain and shock to the credits of the country, due to conditions described and to the suspension of the reserve requirements of the regional banks, will at once endeavor to strengthen their gold reserves, and to do so by presenting Federal reserve notes to the regional banks and demanding gold for them. Should payment be made in lawful money, the demand would be transferred to the Government. Ouer system for many years will be unable to overcome the influence of the process of hoarding on the part of State institutions which are not subject to Federal control or to the influence of regional banks. As contrasted with this condition, if the notes are the obligation of a central bank, the absolute suspension of reserve requirements could be made without involving the credit of the United States for the redemption of the notes, and the last resort of banking practice could be safely employed before suspension of payment in gold would be forced upon the Government. The United States is already obligated for the redemption on demand in gold of a sum of paper money greater than the entire funded debt of the Government. Why add to the peril? Why offer gratuituously the credit of the United States when it is not required? Why create a note issue with a redemption fund hardly more than one-half of the amount which experience shows to be required in Europe, and then attempt to cure its defects by the endorsement of the Government?(7) The Fiscal Agency. The General Fund of the United States at the present time consists of about $90,000,000. on deposit with Government depositaries, and approximately $35,000,000 net in addition, available for deposit with regional banks. By an extraordinary provision of the Owen bill, the disposition and distribution of this huge sum is placed absolutely within the discretion of one officer of the United States Government. It may be said that this power is exercised at the present time. It might also be said that powers not authorized at the present time are required to be exercised in order to make deposits with the Government depositaries by the present system. Is it intended that one officer of the Government shall be the supreme monetary power of the United States? This bill puts it within the power of the Secretary of the Treasury, should he have the courage to exercise it, to bring about an ingflation in one section of this country surpassing the power of inflation possible under any bill which has been offered to Congress as the cure of our currency and monetary ills. No officer of the United States should be empowered to distribute $200,000,000. at will in any section of this country; and to vest that power in the partisan political member of the Federal reserve board is a serious menace to the financial independence of the people of this country. What may be expected on the eve of a National election? One institution acting as the Government’s fiscal agent would render impossible the character of abuse which is only too possible under the provisions of the Owen bill.(8) Refunding Operations. The refunding of the Government bonds now collateral to National bank notes, can better be conducted through the agency of one institution controlling the handling of all of the bonds, than by twelve institutions, which may find themselves in competition with each other in dealing with this difficult problem. Market considerations between the different sections of the country, the ability of one bank to carry its share of the burden without loss as compared with a bank in another section, the necessity which one bank may be under of using short-time Government obligations for the purchase of gold, when those bonds are scattered in the hands of twelve institutions, all suggest a condition of discord rather than of cohesions, and an ineffective plan rather than a comprehensive one. A really dangerous situation might easily develop with twelve regional banks attempting to refund hundreds of millions of dollars of operations, amountinf to many times the capital of all and many more times the capital of each. None of the regional banks are required to consider the size of their capital in any refunding operation authorized under the law. Instead, it is to be a sort of hit or miss proposition, exactly as is true in the case of the foreign operations, with everybody hoping that it may work out all right. Regional banks with a capital of $3,000,000. might be attempting to refund bonds amounting to one hundred million dollars or more. The proposition might look feasible to the board of directors under some conditions, if the reserves were unusually high and the demands of member banks seemed to run light for a period, and they might feel a sort of pride in showing that they could do more than their share. Circulating notes that would be put out against such bonds as they might be purchased from the National banks in order to retire the National bank circulation, would represent an outstanding liability, against which they are apparently obliged to keep no reserve in the bill, and that might result in a presentation for redemption, in one day, of an amount many times the capital of the bank. Again, it would seem to be useless and unnecessary to call the attention of anyone to the great difference in safety to the country and in ability to handle such refunding operations as would be necessary in order to retire National bank circulation through a system of regional banks under the terms of the proposed act, or under any imaginable terms that could be drawhn up, and a central bank, that would be large enough to handle all such operations with safety and without friction.(9) Clearing Functions and Domestic Exchange. Many of the same reasons which make for the real mobilization of reserves in a central bank as agiaainst entire lack of such mobilization in regional banks, apply to clearing functions and domestic exchange. Under the Owen bill, Federal reserve banks are authorized to remit other Federal reserve banks checks of certain described classes that they may receive on demand from member banks. The methods under which the handling of these checks, as authorized under the law, as naturally and logically developed, would carry with them a delay, for this same reasons and in somewhat the same manner as exists in our present system. Instead of accomplishing the immediate presentation and collection of items, a roundabout collection would continue to be encouraged. A regional bank in Chicago, having authorized items deposited with it that were drawn upon banks, members of the New Orleans regional district, would unquestionably forward them to New York for collection, if New York exchange were at a premium and New Orleans exchange at a discount. The Chicago regional bank would not feel called upon to stand the loss of exchange involved. Even if it charged the customer such exchange, it might, in order to make it, forward the items to the New York regional bank. The New York bank might very easily have more of a demand for St. Louis exchange than for New Orleans exchange, which would result in such items then going forward to St. Louis. What is there to prevent the St. Louis regional bank from then forwarding the items to Chicago, should it require Chicago exchange, and what is there to prevent this circling of items during the whole period that New Orleans exchange might be at a discount? In the case of a central bank there would not be the slightest temptation to handle the items in any such manner, for it would be to the interest of the central bank to have the checks cashed immediately. The division of interest that would be represented in the regional banks would not exist in a central bank, for as soon as the Chicago branch obtained credit in New York, its loss of interest would cease, and as soon as the New York bank obtained credit in St. Louis its loss of interest would cease, and so on, whereas, in the case of a central bank, its loss of interest would continue until the items were collected, as every one of its branches would be in the same relation to it as itself.Again, in the handling of the country’s business, a central bank would be economical and would reduce the shipping of currency back and forth between districts to a negligible minimum, whereas, with a regional system, iiwhich must of necessity be based upon districts homogeneous as to their line of business, and which as districts have seasonal trade between each other, shipments of currency almost in as large an amount as those at present would probably occur; while the central bank would count money received in Chicago and paid out in New York as reserve, and could consequently reduce its actual cash in hand in the New York branch to the smallest amount that would handle its natural business before currency might have to be shipped. Yet similar transactions between the Chicago regional bank and the New York regional bank might necessitate shipments of currency back and forth, because money deposited in the Chicago regional bank would not count as reserve for the New York regional bank, when called upon to pay it out. There is no comparison between the two systems as to economy adnd facility, and the regional bank system will unquestionably put upon the people as a whole a tax that, while unseen, will be many times the cost of clearing items and making the domestic exchanges that would be true if these matters were handled through the branches of a central bank.
Original Format
To
Files
