Bill Documentation

Title

Bill Documentation

Creator

Strong, Benjamin, 1872-1928

Identifier

WWP18844

Date

No date

Description

A speech on the Federal Reserve Act and the panic of 1907.

Source

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

Language

English

Text

It seems so a pity that the Chairman of the Senate Committee feels obliged to endeavor to pass his bill by stirring up sectional feeling, instead of basing his arguments upon the value of a regional bank system. Several times now in the Senate, the Senator has stated that the panic in 1907 was deliberately caused by New York interests. He has never proved it, nor attempted to prove it, and the facts as shown in the report of the Comptroller of the Currency disprove his statement beyond any manner of doubt. Instead of the New York bankers hoarding money, as stated by the Senator, the report of the Comptroller shows that they were paying out their reserves, and that all of the hoarding was done by country banks and a few reserve city banks. Further, that the amount of cash piled up in the country banks in the United States, over and above what they were required to hold as reserve, was $113,940,000.,- four times as much as would have been necessary to have brought up the reserves of the three central reserve cities to the amount required by law. This report of the Comptroller sjhows that the country banks held in their vaults an average of 76% actual cash more than was required. The banks in Georgia had an excess of 187%, those of Alabama 169%, those of Colorado 164%, those of Oklahoma 129%, those of Texas 145%, those of Oregon 159%. The cash reserve required fby New York City at this time was $206,000,000. The country banks could have paid in over half of this amount from the excess cash held in their vaults. While these banks were hoarding $113,000,000., banks in New York met demands upon them through actual payment of $25,000,000. out of their reserves. These figures do not represent the opinions of any man. They represent the facts as shown by the statistics published by the Comptroller of the Currency of the United States, under date of December 23, 1907, showing the condition of the National Banks on December 3, 1907. Part of the balances that Western and Southern banks held with New York banks were made up of loans, as they always are in the fall. On September 24, 1913, New York bankers were loaning to the West and South $341,000,000. The figures of the Comptroller in the report mentioned are not divided in such manner as to show the loans made to Western and Southern bankers, but their borrowings went in to make up the total loans of New York banks, the same as they do every year, and New York bankers have stated that some country banks went so far, even, as to endeavor to make loans at that time and have the proceeds shipped in currency in order to build up their reserves in excess of the amount required. A few days previous to the statement published, the reserve of the New York banks was under 20%. The Senator from Oklahoma also neglected to give credit to the New York bankers for having purchased in Europe $ 107,000,000. gold, at great expense to themselves, represented in high premiums that they paid and high rates for foreign exchange. It is to be hoped that these facts and figures will hush forever the unwarranted statements that are being made concerning the panic of 1907.Now, to go back to the Currency Bill. The Senator from Oklahoma stated a long list of guarantees that were behind Federal reserve notes. He built a house of cards, and if the other principles he has stood for in connection with this bill are not more sound than his statement concerning what is back of reserve notes, God pity the people of this country if the bill is passed. The Senator bases his long list of protective features upon the principle that no bank fails except through making bad loans. If this item were the only one capable of causing the failure of a bank, he would have a better foundation for his card house. Unfortunately, banks fail from many other causes. In the first place, he made a beautiful computation of figures showing how little chance there was of a member bank ever failing, and yet six National banks failed in the year 1913, one of ,which, the First-Second National Bank of Pittsburgh, had a capital of $3,400,000., or $400,000. larger than the smallest regional bank is authorized to have. When a bank like that fails, the laws of chance are not of much value, although they sound well in conversation. Banks fail through embezzlement by their officers and directors, through the purchase of bad paper, through the making of bad investments, and through the making of bad loans. In order for the circulating notes of a regional bank to faill back upon the Government, it would be necessary for the bank to fail and have its losses exceed its capital, surplus and undivided profits, and the amount of its capital represented by the double liability, provided it was all good. Embezzlement could cause such a failure. The Federal reserve agent, in his dual position, might easily succeed in stealing more money from a regional bank than the amount necessary. Others in the bank might also be able to do so. The greatest real safeguard to a bank is the employment of honorable men, for a thief in a position of trust can always find a way to steal. The regional banks would unquestionably be made up largely of honorable men, but hiuman nature is not going to be changed merely because we are going to have regional banks, and an occasional thief may be able to work his way into a position of trust in a regional bank. A bank examination might disclose the fact that someone had been stealing, but it would not do so until after the money was gone, for bank examinations cannot anticipate what is in the mind of a thoief. The open market operations authorized to the regional banks could in themselves produce sufficient losses to bankrupt any one of them, and there are many ways in which the surplus funds of the bank might be invested that might result in insolvency. Should such insolvency occur, the catastrophe in the region where the bank was situated would not end with the bank itself but would unquestionably force into bankruptcy many member banskks, which would probably cause the failure of many customers of such member banks whose paper had been placed by them as collateral with the regional bank. Failure of a regional bank would not follow the lines developed by the Senator from Oklahoma, but would take the opposite route. In other words, if a regional bank failed, it would cause disaster all along the line, and its failure might not be caused primarily because of a single piece of bad commercial paper which had been discounted, and rediscounted by a member bank. The circulation in case of the failure of a regional bank, would go right back on the United States Government, and, with such a system, it may be necessary to have the Government guarantee in order to have a safe note.The various checks upon expansion which the Senator from Oklahoma has so carefully laid out, also go for naught when considered in the light of the way business is done and not the way it is talked about. In the first place, the section authorizing the Federal Reserve Board to allow member banks to count Federal reserve notes as reserve, opens the doors for expansion that passes by every one of the checks so profoundly listed by him. If this were done, what would the commercial demands of individuals for currency have to do with the issue of these particular notes; and what would the applications of member banks for notes to supply to individuals who required them for commercial demands have to do with it? And what would the ability of the regional banks to pay out lawful money have to do with notes held as reserve? And what would the consent of the Federal reserve agent count for, if the Federal reserve board authorized banks to hold circulating notes as reserve? And what check would the 33-1/3% gold reserve required be if the Federal reserve board suspended such reserve, as it is authorized to do? Of what value would the fixing of a rate of interest on the notes be, when the Federal reserve bank would merely be deducting such tax from funds to go to the Government and paying them to the Government in place of such funds? What particular good can public opinion play in preventing inflation, if the Federal reserve board authorized the maintenance of reserves in regional circulating notes? All of these checks would go for naught.The question of expansion, too, does not depend necessarily upon the amount of circulating notes that are issued. The reserve bank might not issue one single circulating note, and yet, in the system, tremendous expansion swould occur. All member banks might ask for credits on the books of a regional bank for such items as they discounted. A period of optimism, due to the knowledge that tremendous expansion was possible under the regional system and the feeling that apparently is trying to be spread over the country that everyone can borrow under this new system, might be encouraged until we might have a tremendous overexpansion in all lines. This over-production would be carried by commercial paper eligible for discount under the terms of the bill, and such paper, after having been accepted by banks, and representing bona fide transactions, would be rediscounted with regional banks; all in accordance with the law. Member banks, if they offered eligible paper, under the provisions of the law, could almost demand that it be discounted. Of what value would be the ability of regional banks to take out circulation under a condition of this kind, where no one asked for more circulation credit. Loans and discounts would go up, production would go on until the break came, as is always true under such conditions, and our whole regional bank system might fall to pieces. The statement of the Senator from Oklahoma that regional bank notes could not be issued unless someone wanted them would positively prevent the regional banks from protecting themselves in any way through the issuance of such notes. This development is a natural one, based on human nature, and the way inflation actually occurs. The Federal Board might become so imbued with the ideas expressed by some of those who think that all we need, in order to have prosperity, is to have plenty of money and plenty of credit, ltill they might be carried away with the rest of the country until the crash came. The time to study this matter is now, before any such vicious scheme is foisted upon the people, and we should not be blinded to its dangers by any recital of a chain of safeguards and a chain of exceptional checks, etc., none of which would hang together under conditions that might easily prevail if such a bill became law.

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Citation

Strong, Benjamin, 1872-1928, “Bill Documentation,” No date, WWP18844, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.