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THE CURRENCY PROBLEM 
 
 AND THE 
 
 PRESENT FINANCIAL SITUATION 
 
Cornell University 
 Library 
 
 The original of this book is in 
 the Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924032518643 
 
THE CUERENCY PROBLEM 
 
 AND THE 
 
 PRESENT PmANCIAL SITUATION 
 
 A SERIES OF ADDRESSES DELIVERED AT 
 
 COLUMBIA UNIVERSITY 
 
 1907-1908 
 
 Wefa gork 
 THE COLUMBIA UNIVERSITY PRESS 
 
 1908 
 
 Ml rights reserved 
 

 .- G-ir-^fr-Sr-^-rtng 
 
 COPYEIQHT, 1908, 
 
 By the COLUMBIA UNIVERSITY PRESS. 
 
 Set up and electrotyped. Published February, 1908. 
 
 h^O 
 
 Norinaati $i(gz 
 
 J. 8. Gushing Co. —Berwick & Smith Co. 
 
 Norwood, Mass., U.S.A. 
 
CONTENTS 
 
 FAGB 
 
 Introduction. — The Crisis of 1907 in the Light of History . vii 
 Edwin R. A. Seligman, McVickar Professor of PoKtical 
 Economy, Columbia University. 
 
 The Modern Bank 1 
 
 Frank A. Vanderlip, Vice-President of the National City 
 Bank. 
 
 "\ The Stock Exchange and the Money Market ... 19 
 
 Thomas F. Woodlock, former Editor of the Wall Street 
 Journal. ' 
 
 Government Currency vs. Bank Currency .... 41 
 A. Barton Hepburn, President of the Chase National Bank. 
 
 Gold Movements and Foreign Exchanges .... 61 
 Albert Strauss, of Messrs. J. & W. Seligman & Co. 
 
 ~""' The Wew York Clearing House 89 
 
 WiixiAM A. Nash, President of the Corn Exchange Bank. 
 
 •-—.Clearing Houses and the Currency 95 
 
 James G. Cannon, Vice-President of Fourth National Bank. 
 
 ^^ American and European Banking Methods and Bank Legis- 
 lation Compared 119 
 
 Paul M. Warburg, of Messrs. Kuhn, Loeb & Co. 
 
 The Modern Corporation 153 
 
 George W. Perkins, of Messrs. J. P. Morgan & Co. 
 
INTRODUCTION 
 
 The Crisis of 1907 in the Light of History 
 
 BY 
 
 EDWIN R. A. SELIGMAN 
 
INTRODUCTION 
 
 The Crisis of 1907 in the Light of History 
 
 The occasion of the addresses collected in this volume 
 was a desire to contribute to the understanding of the 
 crisis of 1907, and to lay down some principles which 
 might be of service in the reconstruction of our currency 
 system. The first question, however, that will obviously 
 present itself, is as to whether the crisis of 1907 was 
 primarily a financial or an industrial crisis ; and it may be 
 well, before taking up the specific problems raised by the 
 addresses, to consider this question a little more closely. 
 
 From one point of view, indeed, every economic crisis 
 is a financial crisis. For since values are expressed in 
 terms of money, and since the modern business super- 
 structure is erected on the basis of credit, every economic 
 revulsion expresses itself through the medium of a change 
 in prices; and since the bank is the center of credit 
 operations, every crisis inevitably involves a revolution 
 in the conditions of credit. From this point of view, all 
 crises may be declared to be financial crises. 
 
 From another standpoint, however, a distinction may 
 be drawn between financial crises proper and commercial 
 or industrial crises in the larger sense. There may be 
 a financial panic or crisis due primarily to temporary and 
 sudden oscillations in the condition of the money market 
 or in the price of securities. Such oscillations, sharp and 
 sudden though they be, may have but little relation, 
 whether of effect or of cause, to the general commercial 
 and industrial interests. Of this character, for instance, 
 were the original Black Friday in England, in 1745, and 
 
X mTRODUCTION 
 
 its namesake, the famous Black Friday in 1867 in New 
 York, as well as many spasmodic fluctuations due either 
 to political rumors like that which followed the Vene- 
 zuelan Message of 1895, or to temporary speculative 
 manipulations, like the Northern Pacific "squeeze" of 
 1901. Of a distinctly different nature are those wider 
 disturbances which are traceable to more general economic 
 causes and which, even though they culminate in acute 
 financial trouble, are followed by an industrial and com- 
 mercial depression of more or less magnitude. 
 
 Into which category is to be put the crisis of 1907; and 
 if in the latter, what were its causes .'* 
 
 At the outset it must be remembered that crises are 
 essentially modern phenomena. We have had financial 
 transactions, and that, too, on a large scale, for many 
 centuries and in many civilizations. But crises, in con- 
 tradistinction to temporary panics, have existed in Eng- 
 land only since the middle of the eighteenth, and in 
 other countries only since the beginning of the nineteenth, 
 century. The first crisis in England, barring the financial 
 flurry connected with the South Sea Scheme in 1720, was 
 that of 1763, followed by the minor disturbances of 1772 
 and 1783, and the more wide-spread convulsions of 1793, 
 1810, and 1825. The first crisis in the United States 
 was that of 1817; and it was not until 1837 that we find 
 the first international crisis, spreading from the United 
 States to England and then to France. In Germany the 
 period of important crises was ushered in even later. 
 
 Crises, in other words, are products of modern economic 
 life. Modern economic life, however, has as its basal 
 characteristic industrial capitalism, with the factory sys- 
 tem and the newer methods of production for a wide 
 market. This transition to modern industrial capitalism 
 began in England in the latter half of the eighteenth 
 century, was initiated in America in the first two decades 
 
THE CRISIS OF 1907 xi 
 
 of the nineteenth century, and took place on the Conti- 
 nent at a later date, last of all in Germany. The explana- 
 tion of crises must therefore be sought in some feature 
 of our modern capitalistic life. 
 
 The current explanations may be divided into two 
 categories. Of these the first includes what might be 
 termed the superficial theories. Thus it is commonly 
 stated that the outbreak of a crisis is due to lack of con- 
 fidence, — as if the lack of confidence was not in itself 
 the very thing which needs to be explained. Of still 
 slighter value is the attempt to associate a crisis with some 
 particular governmental policy, or with some action of 
 a country's executive. Such puerile interpretations have 
 commonly been confined to countries like the United 
 States, where the political passions of a democracy have 
 had the fullest sway. Thus the crisis of 1893 was ascribed 
 by the Republicans to the impending Democratic tariff 
 of 1894 ; and the crisis of 1907 has by some been termed 
 the "Roosevelt panic," utterly oblivious of the fact that 
 from the time of President Jackson, who was held re- 
 sponsible for the troubles of 1837, every successive crisis 
 has had its presidential scapegoat, and has been followed 
 by a political revulsion. The crisis of 1857 helped to 
 weaken the Democrats; the crisis of 1873 resulted in a 
 popular majority for Tilden; the crisis of 1884 put 
 Cleveland into the presidential chair; and the crisis of 
 1893, with the ensuing depression, brought the Repubh- 
 cans back to power. 
 
 Opposed to these popular, but wholly unfounded, 
 interpretations is the second class of explanations, which 
 seek to burrow beneath the surface and to discover the 
 more occult and fundamental causes of the periodicity 
 of crises. Here we find an interesting and progressive 
 series of attempts to grapple with the diflSculties of the 
 problem. For a long time economists and business men 
 
xii INTRODUCTION 
 
 advanced the theory of overproduction, forgetful of the 
 fact that there really cannot be any such phenomenon 
 as too much actual production of wealth. With the dis- 
 appearance of this doctrine there came into prominence 
 its variant, which put the emphasis on relative, rather than 
 absolute, or universal overproduction, that is, the over- 
 production of some things and the underproduction of 
 others. This theory also failed to command general 
 assent, for the reason that no one could show in what 
 respects there was any underproduction of wealth, or 
 any lack of particular products during the years preceding 
 a crisis. Others, again, have sought the causal fact in 
 underconsumption, alleging that the larger consumption 
 of wealth will in itself take up all the slack of produc- 
 tion, and thus obviate a crisis. This explanation also is 
 inadequate, because it overlooks the fact that the real 
 falling oflF in consumption comes after the crisis has 
 developed and not before : in fact, the period of pros- 
 perity which precedes a crisis is generally marked by a 
 prodigious increase of consumption. 
 
 The socialists, again, seek to explain crises by the exist- 
 ence of private property in the means of production, 
 and contend that if we were to cease the exploitation of 
 the laborer by the modern capitalistic method, crises 
 would disappear. While, however, agreeing in this 
 general conclusion, they differ in their detailed analyses. 
 Thus Rodbertus maintains that the secret of crises is to 
 be found in the fact that the progress of industry causes a 
 continually greater output of product, while the exclusion 
 of the laboring classes from any participation in this 
 increased productivity involves a relative diminution in 
 demand, and thus ultimately a fall in price, culminating 
 in a crisis. Marx, on the other hand, puts the emphasis 
 on the fact that the necessary fall in the rate of profits 
 (which, according to him, is a result of the surplus value, 
 
THE CRISIS OF 1907 xiii 
 
 or exploitation theory) is incompatible with the greatly 
 increased productivity of fixed capital inherent in the 
 present system, and that the clashing of these two incon- 
 gruous tendencies of modern industrial life brings about 
 a relative overproduction of capital, and gives rise to 
 periodical explosions. This view, finally, is sharply 
 criticized by the latest and ablest of the socialist theorists, 
 Tugan-Baranowsky, who in turn maintains that crises 
 are due primarily to the fact that under the modern 
 system it is impossible to invest the fresh accumulations 
 of capital proportionally in all branches of industry, 
 and that it is this relative disproportion of accumulated 
 capital to the particular demand that causes the anarchy 
 of the market and the recurrent convulsions of industry. 
 
 While the socialist scholars have undoubtedly made 
 valuable contributions to the discussion of the problem, 
 they, like the earlier economists, have erred in laying 
 stress on the question of technical production rather 
 than, as is done by the more recent economic thinkers, 
 on that of business enterprise and capitalization. This 
 is manifestly not the place to elaborate a general theory 
 of crises. If we attempt, however, to give the bare 
 outline of the modern explanation, it would be approxi- 
 mately as follows. 
 
 The problem of crises or industrial depressions is one 
 of relative capitalization. Under the present system of 
 enterprise, production is carried on in mass for a prospec- 
 tive market, rather than as formerly in small quantities 
 to fill a definite order. Even if it be contended that 
 certain factories nowadays are busy with producing to 
 order, it is none the less true that numerous plants are 
 continually being erected in the expectation that orders 
 will be received in the future. The good times, or periods 
 of rising prices, may be due to many causes — either m 
 general to an augmented gold output, or in particular 
 
xiv INTRODUCTION 
 
 to the increase in the demand -for some special product, 
 whether in the iron industry through a new navy pro- 
 gram, or in the clothing industry through the outbreak 
 of a war, or in any other industry through a change of 
 fashion or what not. Prices first rise in the particular 
 enterprise, production augments, the movement spreads 
 to other lines of business, and the new enterprises are 
 financed by loans from the banks or trust companies, or 
 by the sale of securities on a capitalization proportionate 
 to the anticipated earnings. In times of buoyancy we 
 are continually capitalizing anticipated earnings and 
 future hopes, and we do this through the utilization of 
 credit on a large scale. We build railways, put millions 
 into steel plants, "boom" land sites, and form combina- 
 tions of all kinds, employing the credit facilities granted 
 by the banks, or throwing the securities on the stock 
 market. We "water" the stock or, if that be forbidden 
 by law, we drive the market quotations to a high point, 
 because we think that this is warranted by prospective 
 earnings. Sometimes we say that we capitalize the 
 good will or, in the case of quasi-public enterprises, the 
 franchise ; but in all cases we capitalize the future, because 
 we believe that we shall earn an income which will 
 justify this capitalization. 
 
 The peculiarity, however, of an up-grade movement 
 which rests on modern credit facilities is that we wear 
 magnifying glasses or look at the future in too roseate 
 a light. It is a natural tendency of human nature to 
 capitalize one's hopes and expectations too liberally. 
 If this is done on a continually larger scale, the capitali- 
 zation becomes so great that actual earnings do not come 
 up to our anticipations or the fear of a discrepancy 
 between actual and estimated earnings begins to obsess 
 us. It becomes necessary to reduce the capitalization 
 to its true dimensions, i.e. to a sum proportioned to 
 
THE CRISIS OF 1907 xv 
 
 actual earnings. This process of readjustment of over- 
 capitalized values obviously involves loss; but readjust- 
 ment there must be. If the realization of its necessity 
 is sudden, we have a crisis or panic. In the height of 
 the period of exaltation or prosperity, something happens 
 to disturb confidence. A chance occurrence, a mere 
 rumor, may suffice. Some bank considers its credit too 
 heavily engaged, or suspects the adequacy of the collateral. 
 Just at the flood of the tide, when new demands are 
 constantly being made, it finds itself unable or unwilling 
 to respond. Its refusal starts or intensifies the feeling 
 of insecurity, and with the inability of some important 
 concern to mept its obligations, a failure occurs and the 
 crisis is precipitated. If, on the other hand, the situation 
 is well handled, and if the readjustment of the over- 
 capitalized values to actual earning capacity can be 
 brought about more gradually, we have, in lieu of a crisis, 
 a Uquidation and a period of depression which lasts 
 until the up-grade movement again sets in. 
 
 Crises, therefore, are not necessarily the result of 
 increased technical production. The important point 
 is not production, but capitalization. There may be 
 overcapitalization, without overproduction. Overpro- 
 duction of particular things may indeed accompany 
 overcapitalization, but the stress must be laid, not on the 
 relation between production and consumption, as the 
 older writers assumed, but on the discrepancy between 
 the investment and its returns. 
 
 While the general features of a crisis are thus every- 
 where the same, the details differ in each case. Some- 
 times it is the banks that fail first, sometimes the general 
 business enterprises. Sometimes it is the railway securi- 
 ties that first feel the strain, at other times "the indus- 
 trials," and at still other times the raw materials. Some- 
 times the bolt comes out of the clear sky with prices 
 
xvi INTRODUCTION 
 
 at a maxinaum, sometimes it is only the last stage of a 
 period of liquidation with progressively lower prices. 
 But however unpredictable and seemingly inscrutable 
 the actual course of events, the fundamental explanation 
 is always the necessary readjustment of capitalization 
 to actual earning capacity. 
 
 That this is true of all our crises can be seen from a 
 hasty review. The crisis of 1817 was the result of the 
 first utilization of modern capitalist methods in America. 
 The period of the War of 1812 was marked by three facts : 
 first, the industrial revolution in New England and the 
 introduction of the factory system in the textile industry ; 
 second, the great development of internal improvements 
 through canal and turnpike companies ; third, the sudden 
 multiplication of banks to finance the new enterprises. 
 The consequence was the so-called " Golden Age," which 
 lasted for several years, until checked by the immense 
 imports from England after the war, and destroyed by 
 the collapse of the overcapitalized undertakings. It was 
 well into the twenties before the country recovered from 
 the industrial depression, and then came the second 
 up-grade movement, which culminated in 1837. This 
 was primarily a land and transportation, rather than a 
 purely industrial, phenomenon. The canals and turn- 
 pikes in the East were now being replaced by railways, 
 and the spread of slavery caused a rush of cotton planters, 
 not only to the black belt, but to the pine barrens and 
 hill country of the South. It was primarily land values 
 that were being overcapitalized, and the process went on 
 to such an extent that the annual land revenues of the 
 government now exceeded the total governmental receipts 
 from all sources of a few years before. Finally, to finance 
 this land movement there were called into being hundreds 
 of the "coon-box" banks, who found a champion in 
 President Jackson in his war against the Bank of the 
 
THE CRISIS OF 1907 xvii 
 
 United States. As the period of exaltation had been 
 unexampled, so the collapse was proportionately great. 
 The crisis of 1837, followed as it was by those of 1839 
 and 1841, was still more serious than that of 1817. 
 
 It was again well-nigh a decade before the readjustment 
 of values had been completed. The following decade 
 was in turn marked by five striking facts : first, the gold 
 discoveries of California and Australia, which soon in- 
 itiated a general rise of prices; second, the consumma- 
 tion of the revolution in the media of transportation by 
 land and water, and the settlement of the entire Missis- 
 sippi Valley, the most fertile portion of the continent; 
 third, the abolition of the corn laws m England and the 
 opening up of a market for our incipient surplus of wheat ; 
 fourth, the era of industrial invention which resulted in 
 the application of capitalistic methods to new classes 
 of enterprise beside the old textile industries ; and fifth, 
 the development of free banking with the "wild-cat" 
 institutions to provide the credit facilities for this pro- 
 digious overcapitalization. The crisis of 1857, which 
 was the inevitable result, was perhaps still more acute 
 than its predecessors. The continuance of its depressing 
 influence on industry, however, was checked by the 
 economic effects of the Civil War, which gave an artificial 
 stimulus to many forms of enterprise. 
 
 In the period immediately succeeding the war, great 
 changes again occurred. The transcontinental roads 
 were completed and the Eastern trunk lines consolidated ; 
 the great wheat fields of the country were opened up under 
 the new homestead laws, and the period of large exports 
 began; the Bessemer process revolutionized the iron 
 industry, and the factory system was now applied to 
 boots, sewing-machines, and agricultural implements; 
 the great copper and silver deposits were developed, and 
 the petroleum output grew apace; while the greenbacks 
 
xviii INTRODUCTION 
 
 and the greenback movement fomented the process of 
 inflation. The discrepancy between the capitalization 
 and the actual earning capacity of the country's business 
 enterprises again became so overwhelming that the 
 necessary readjustment took the form of the convulsion 
 of 1873 — a convulsion the depressing effects of which 
 were felt with almost increasing severity for six years. 
 
 The crises of 1884 and 1893 were both less intensive 
 and more short-lived than their predecessors, for reasons 
 which it is now not difficult to explain. The resumption 
 of specie payment in 1879 was rendered possible, and 
 was followed, by a series of abundant crops which re- 
 vivified enterprise, and which were aided by the use of 
 agricultural machinery on a large scale. The energy 
 and the capital of the nation, however, were devoted in 
 increasing measure to the transportation industry. This 
 resulted in a perfect orgy of new railroad construction, 
 the entire mileage of the country increasing in five years 
 by fifty per cent. As the overcapitalization was primarily 
 a railway overcapitalization, the resulting reaction of 
 1884 was essentially a railway crisis, leading to but 
 indirect and temporary disturbances in industry at large. 
 Within a year or two recovery was general, and the 
 prosperous years from 1886 onward were reflected in 
 the existence of a huge surplus of governmental revenues. 
 The live-stock and meat-packing business attained its 
 high-water mark; the textile industries made great 
 progress in the finer grades, and the ready-made clothing 
 industry assumed vast dimensions; the iron and steel 
 industry was revolutionized anew by the invention of 
 the open-hearth process and the utilization of cheap ore 
 from the Lake Superior region; the South was being 
 quickly developed by the Northern capital that poured 
 into the cotton mills and the coal and iron mines; elec- 
 tricity was applied to industry on an increasing scale. 
 
THE CRISIS OF 1907 xix 
 
 and the country took rapid strides in its evolution from 
 an agricultural to an industrial community. 
 
 The movement of overcapitalization, however, was 
 somewhat checked by two important facts : the down- 
 ward tilt of world prices in general, which had been 
 falling since 1873 and which were fast reaching their 
 lowest point; and the relative shrinkage, not only in the 
 amount of the wheat crop, but also in the value of both 
 the wheat and the cotton crops. The resulting reaction 
 of 1893, which was itself partly due to the ill-timed experi- 
 ments with silver legislation, was as a consequence neither 
 so profound nor so long-continued, since the discrepancy 
 between anticipated and actual values turned out not 
 to be so excessive. 
 
 When we come particularly to the crisis of 1907, we 
 find that the general causes were very much the same. 
 The last decade has been characterized by the most 
 unexampled prosperity in our history. The most striking 
 initial cause is the prodigious increase in the gold supply. 
 Whereas the annual average value of the output of gold 
 was under one hundred millions in the first half of the 
 eighties, and only a hundred and twelve millions in the 
 second half, it has grown with such enormous strides that 
 during the past two years it has reached an annual value 
 of about four hundred millions. The result has been a 
 constant rise of prices from the minimum level of 1896. 
 The rapid accumulation of gold, much of which went 
 into the bank reserves, enabled the financial institutions 
 to expand their credit facilities many fold, and as a con- 
 sequence enterprise flourished in every direction. During 
 the last decade the record crops of cereals and cotton, 
 the extension of dry farming, the effects of irrigation on 
 fruit culture, the development of truck farms, and the 
 unparalleled increase of immigration led to a remarkable 
 enhancement of land values throughout the length and 
 
XX INTRODUCTION 
 
 breadth of the land; the output of coal doubled, that of 
 petroleum more than doubled, and that of pig iron, as 
 well as of steel, actually trebled; the huge combinations 
 of capital, now spreading to every form of enterprise, 
 effected prodigious economies and revolutionized business 
 methods ; and the transition from the agricultural to 
 the industrial phase of economic development proceeded 
 with unlooked-for celerity. Values were pushed up on 
 all sides and the hopes of a prosperous community were 
 capitalized with a recklessness born of unbounded faith. 
 The pace was too rapid; the reaction was bound to 
 ensue. In the late autumn of 1907 the revulsion was 
 precipitated, with all the familiar accompaniments of 
 an acute panic such as the collapse of several financial 
 institutions, the sudden curtailment of loans, leading to 
 the failures of some prominent business concerns, the 
 hoarding of money, the appearance of a premium on 
 currency, going to over three per cent, and the frantic 
 efforts of the financiers to relieve the situation by the 
 importation of gold, the issue of clearing-house certificates 
 and the interference of government through the dubious 
 expedients of the placing of a new bond issue and the 
 emission of Treasury loan certificates. 
 
 The crisis of 1907, however, is on the whole not com- 
 parable either to that of 1857 or to that of 1873, for 
 reasons which have thus far perhaps not been adequately 
 discussed. These reasons may be classed under five 
 heads. 
 
 In the first place, the very magnitude of the country's 
 resources has been a favorable factor. The unparalleled 
 prosperity of the past decade has made possible the 
 accumulation of a vast reserve in the case, not only of 
 the great corporations, but also of the average business 
 man. This reserve has acted as a buffer to the shock 
 of reaction, and has softened the impact through a speedy 
 
THE CRISIS OF 1907 
 
 XXI 
 
 restoration of confidence in the excellence of the country's 
 assets and in the real solvency of business. 
 
 Secondly, the crops, while not those of a bumper year, 
 have been large and valuable. It is significant that 
 almost each of our great crises in the past has been pre- 
 ceded either by the failure of the harvest at home or by 
 the existence of such a bountiful output abroad as greatly 
 to reduce prices. It must be remembered that, notwith- 
 standing all recent developments, this country is still 
 primarily agricultural, and that upon the varying extent 
 of our great staple crops depends in large measure the 
 effective demand which sets and keeps in motion the 
 wheels of business activity. By a fortunate coincidence, 
 the crisis was attended by a phenomenon which in ordi- 
 nary times would have spelled prosperity, and which 
 in this extraordinary conjuncture helped to bring back 
 normal conditions. 
 
 In the third place, the overcapitalization of values was 
 somewhat less conspicuous than hitherto in our greatest 
 industry — that of transportation. Some of our former 
 crises have, as we know, been brought on primarily by 
 the speculative building of railroads. But whereas in 
 the early eighties the annual increase of construction 
 reached ten and eleven thousand miles, during the past 
 five years, with a railway system three times as large, the 
 annual increment of new construction was only four or 
 five thousand miles. The consequence has been that 
 with the rapid upbuilding of the country the railways 
 have grown up to their capitalization, until it is now 
 reasonably certain that there has been for some little 
 time scarcely any actual overcapitalization. A striking 
 proof of the absence of any real discrepancy between 
 normal values and the capitalization of actual earning 
 capacity is afforded by the congestion of traffic of a year 
 or two ago ; and even with only normal business activity 
 
xxii INTRODUCTION 
 
 it is computed that, 'm order to prevent this congestion in 
 future and to maintain the railways at a reasonable 
 standard of efficiency, there will be required an annual 
 investment of over a billion dollars. 
 
 Fourthly, the crisis of 1907 was preceded by a period 
 of gradual liquidation. General prices of commodities, 
 with a few notable exceptions like that of copper, were 
 indeed high until well-nigh the outbreak of the panic. 
 But the prices of securities had for some time undergone 
 a marked shrinkage. Some, quite mistakenly, attribute 
 this shrinkage to lack of confidence engendered by the 
 governmental policy toward industry; others, with equal 
 readiness and no less extravagance, ascribe it to the distress 
 caused by the exposures of the methods of "high finance" 
 in positions of trusteeship. In reality, however, the 
 depreciation in securities was caused chiefly by the rise 
 in the rate of interest. In fact the one phenomenon is 
 really the other; for where earnings remain unchanged, 
 the capitalization of the earnings depends on the rate of 
 interest. If it be objected that the price of stocks fell 
 because of the apprehended decrease of future earnings, 
 due to lack of confidence, the retort is obvious that this 
 would not suffice to explain the equal or still greater fall 
 in the capital value of bonds, private or public, with a 
 fixed rate of interest, The depreciation was not national, 
 but international, in character; and it applied not only 
 to our railway and industrial securities, but to the English 
 "Consols" as well. 
 
 The rise in the interest rate, which explains the fall 
 in the capital value of securities, was due to several 
 causes. First and foremost is the increase in the gold 
 output. For, as is now well established by economic 
 theory and reinforced by the observations of practical 
 men, while any increase in the supply of loanable funds 
 on the call-money market temporarily reduces the "money 
 
THE CRISIS OF 1907 xxiii 
 
 rate," an increase in the general supply of standard 
 money in the community, on the contrary, raises not only 
 the price level of all commodities, but the price for the 
 use of capital, which we call the general rate of interest. 
 The increase of money as the standard of value inevitably 
 tends to increase the general rate of interest. Again, 
 since the rate of interest is always adjusted to the earnings 
 of the. fund of capital at the margin of its employment, 
 the rate of interest has risen because there has been 
 relatively less capital available for employment. The 
 fund of free capital has been rapidly diminishing during 
 the past few years. Hundreds of millions were destroyed 
 in the Boer and Japanese wars; hundreds of millions 
 more disappeared through the destruction of San Fran- 
 cisco and Valparaiso; and countless millions in addition 
 have been utilized to finance the more or less dubious 
 schemes which have sprung up in all countries during the 
 years of prosperity. Even though there was no great 
 overcapitalization of railroads and even though many 
 of the industrial enterprises were really legitimate, the 
 discounting of the future was not quite ample, and the 
 capital was invested more rapidly than the immediate 
 returns would warrant. The replacement fund, in other 
 words, was neither quite large enough nor quite active 
 enough ; and with the gradual exhaustion of the available 
 free capital, interest rates necessarily rose and security 
 values as a consequence fell. 
 
 The period of liquidation was thus a fortunate event. 
 By checking the movement of exaltation and preventing 
 the level of prices from being so extreme, it kept the reac- 
 tion from being so great. Where the crest of the wave is 
 lower, the shock of its break is less. Had the ascent of 
 prices and values gone on unhindered, the convulsion of 
 1907 would have been far more severe. From this point 
 of view, even those who mistakenly persist in ascribing 
 
xxiv INTRODUCTION 
 
 the lack of confidence to the President ought in reality 
 to be grateful to him; for to the extent that he may be 
 said to have superinduced the liquidation of the spring 
 and summer, he assuredly contributed to mitigate the 
 shock of the inevitable reaction in the autumn. 
 
 The fifth and final cause of the lesser magnitude of the 
 crisis is the development of trusts. Until we attain the 
 right perspective, it is always difficult to get a correct 
 view of the far-reaching changes which are taking place 
 under our very eyes. Especially true is this of such a 
 veritable revolution as is typified by the modern con- 
 centration and integration of industry into the vast 
 combinations known as trusts. There are indeed many 
 disquieting and untoward symptoms in the development 
 of which this is not the place to speak. But as against 
 the undoubted perils of what we are all now coming to 
 recognize as an inevitable process, we sometimes forget 
 to put at least one countervailing advantage which is of 
 especial importance in this connection. The modern 
 trust, as typified in its most developed form by the United 
 States Steel Corporation, is apt to exert an undeniably 
 steadying influence on prices. Precisely because of the 
 immense interests at stake, and the danger of a reaction, 
 the trust with its consummately able management tends 
 toward conservatism. As compared with the action of 
 a horde of small competitors under similar conditions, it 
 is apt during a period of prosperity to refrain from mark- 
 ing up prices to the top notch, and is likely to make a 
 more adequate provision for the contingencies of the 
 market. With this greater moderation is apt to be asso- 
 ciated a more accurate prevision, which succeeds in a 
 more correct adjustment of present investment to future 
 needs. The drift of business enterprise in its newer 
 form is thus toward a relative checking of the discrepancy 
 between estimated and actual earnings or, in other words. 
 
THE CRISIS OF 1907 xxv 
 
 toward a retardation in the process of overcapitalization. 
 The history of trusts is still too recent, and in not all of 
 them are we yet able to discern the working out of what 
 ultimately will come to be recognized as the real laws of 
 their evolution. To those, however, who comprehend 
 what this revolution in business enterprise really implies, 
 it can scarcely be doubtful that the fruit of this steadying 
 influence and of the better adaptation of the present to 
 the future is already perceptible. Notwithstanding the 
 quite unexampled prosperity of the last decade, the tempo 
 of overcapitalization has been relatively less rapid and 
 the process of readjustment throughout the world of 
 enterprise has therefore been less extreme. Industry 
 has slackened rather than collapsed, and the disturbance 
 itself has been comparatively short-lived, with the prospects 
 of an early rebound. The influence of trusts in moderat- 
 ing crises and in minimizing depressions will doubtless 
 become more apparent with each ensuing decade in the 
 history of modern industry. 
 
 While the general causes which are responsible for the 
 crisis of 1907 have been recounted above, there still 
 remains one point of fundamental importance. If we 
 compare our economic history with that of Europe, we 
 observe that acute financial crises have there almost 
 passed away. England has had no severe convulsion 
 since 1866, and in France and Germany also the dis- 
 turbances are more and more assuming the form of 
 periodic industrial depressions rather than of acute 
 fijiancial crises. The responsibility for the continuance 
 in this country of a phenomenon which is in large meas- 
 ure vanishing elsewhere rests beyond all peradventure of 
 doubt on the inadequacy of our currency system. Its 
 defects have frequently been pointed out, but never 
 perhaps so fully and so convincingly as in the following 
 
xxvi INTRODUCTION 
 
 addresses. It is proverbially difficult in a democracy 
 to secure a hearing for the conclusions of experts; and 
 yet no lasting progress can otherwise be made. 
 
 All important reforms in currency legislation have been 
 in great part due to the influence of the practical expert. 
 Ricardo was a stock-broker ; Lord Overstone and Gilbart 
 were prominent bankers ; and in France and Germany 
 the names of the financiers who have shaped legislation 
 are legion. In view of the fact, however, that most success- 
 ful men of affairs have neither the time nor the talent for 
 the exposition of principles, the professorial reformer 
 may be permitted to quote in their defense the witticism 
 of Bernard Shaw: "He who can, does; he who cannot, 
 teaches." We are, however, fortunate in New York in 
 possessing among our foremost bankers men who can not 
 only do things, but who can teach, and who can put their 
 teaching into effective language. 
 
 In these addresses, which were delivered to large audi- 
 ences at Columbia University on successive Fridays from 
 November, 1907, to February, 1908, two facts are espe- 
 cially to be emphasized. The first is that the contributors 
 to this volume are not only speaking out of the fullness 
 of their practical experience, but that they have thought 
 deeply on various subtle points of theory. In fact, the 
 student will seek in vain in the scientific literature for 
 so clear and so satisfactory an exposition of some impor- 
 tant topics as can be found here. This is true, for in- 
 stance, of the principles underlying call-money fluctuations, 
 international gold movements, the issue of emergency 
 currency through clearing-house certificates, and the 
 nature and effects of commercial paper abroad. Even 
 more valuable and significant, however, is the fact that 
 there runs through the entire volume an unexpected har- 
 mony of thought and a close agreement, not only as to 
 the ultimate ideal to be attained in our financial relations, 
 
THE CRISIS OF 1907 xxvii 
 
 but as to the next step to be taken in the legislative reform 
 of our currency. For all the speakers virtually agree 
 that even more important than the inelasticity of our note 
 issue is its decentralization. The struggle which has 
 been victoriously fought out everywhere else must be 
 undertaken here in earnest and with vigor. 
 
 To have gathered upon one platform these distinguished 
 men of affairs and to have induced them to put their 
 ideas into print was not an easy task. Columbia was, 
 however, convinced that here was both an opportunity 
 and an obligation — an opportunity to experts to give 
 to the public the benefit of their mature convictions, and 
 an obligation on the part of the university to assume its 
 share in the education of the community and to make a 
 significant contribution to one of the most live and urgent 
 of present-day problems. 
 
THE MODERN BANK 
 
 BY 
 
 FRANK A. VANDERLIP 
 
THE MODERN BANK 
 
 The cost of the financial crisis of 1907, measured by 
 whatever standard you choose, measured either by the di- 
 rect financial losses, by the disorganization of industry, by 
 the destruction of confidence, or by the discouragement of 
 thrift, makes it one of the great calamities of history, the 
 burden of which will by no means have been confined to 
 wealth alone. That burden falls with severity on every 
 class and on all sections of the community. 
 
 Financial crises have occurred with such periodic 
 regularity in the United States that many have, with Mo- 
 hammedan stolidity, come to regard them as "The Will 
 of Allah," and to look alike upon banking panics and 
 crop failures as dispensations of an inscrutable Provi- 
 dence, just as we once regarded visitations of plagues and 
 fevers. 
 
 In no other great nation of the world are such financial 
 catastrophes regularly enacted. Nowhere else may be 
 found an important financial system subject to such vio- 
 lent turbulence as is the money market of the United 
 States. 
 
 If there is any lesson to be learned from history, then 
 there is none clearer than that the financial system of this 
 country inadequately fulfils its functions and ineffectively 
 serves the interests of commerce and industry. If there 
 is any lesson to be learned from experience and example, 
 there is none more obvious than that the other great 
 nations have evolved orderly systems of finance which in 
 their application to the problems of banking and currency 
 are immeasurably superior to our own, and that there are 
 no inherent reasons in the position of our affairs which 
 
 3 
 
4 THE CURRENCY PROBLEM 
 
 would prevent our profiting by their experience and 
 example. 
 
 If these general statements are true, if their force is not 
 exaggerated, then there can be few subjects that are of 
 greater importance for general public consideration. If 
 the crisis, the effects of which still surround us, has been 
 a national calamity ; if similar crises have come and under 
 unchanged conditions are likely to continue to come, with 
 periodic regularity ; if intelligent examination indicates that 
 such disturbances bear no relation of necessity to general 
 commercial development ; if the example of other nations, 
 working under financial systems different from ours, shows 
 comparative freedom from such crises, — then clearly it is 
 time to give to these somewhat intricate problems the con- 
 sideration which their importance merits. I believe it is 
 a wise and valuable step for this University to undertake 
 to add something to general public knowledge on the 
 subject. 
 
 The Modem Bank is the subject which has been as- 
 signed for opening the series of discourses which have 
 been planned. In developing the subject I shall under- 
 stand it to mean the commercial bank as distinct from 
 savings banks and trust companies, and shall more par- 
 ticularly limit the consideration to the development and 
 operation of commercial banking under the national 
 banking system. 
 
 The fundamental proposition which I first wish to 
 establish in regard to all commercial banking, is that the 
 business of the modern bank is almost solely the exchange 
 of credit, — to use a clear but homely phrase, the swapping 
 of credits. The business of a bank is not in the main the 
 reception of money and its safe keeping, nor is it the loan- 
 ing of money. The money transactions of a bank are, 
 under ordinary conditions, comparatively insignificant : 
 almost its entire business consists of receiving from its 
 
THE MODERN BANK 5 
 
 customers their evidences of indebtedness, which have a 
 narrow currency, and giving to those customers in ex- 
 change the bank's evidences of indebtedness, which have 
 a wide currency. These evidences of a bank's indebted- 
 ness are then transferred from one individual to another 
 and from one bank to another, and in that way the credits 
 created serve the purpose of the medium of exchange by 
 which perhaps ninety-five per cent of the exchange tran- 
 sactions of commerce take place. 
 
 It is a misconception to suppose that a bank first accu- 
 mulates deposits and then loans them out to borrowers. 
 The operation is the reverse. The bank first makes a 
 loan to the borrower and in so doing creates a deposit. 
 The borrower exchanges his credit, his evidence of in- 
 debtedness, for the bank's credit, a deposit balance. The 
 creation of these credits has relation to production ; their 
 liquidation is related to consumption. If production 
 increases, the demand for this exchange of individual 
 credit for bank credit increases; and the indebtedness 
 incurred is liquidated as the articles upon which the 
 financial credit was based enter into consumption. 
 
 The manufacturer buys raw material and, in order that 
 he may pay for it, exchanges his credit for the bank's 
 credit. The raw material is converted into a finished 
 product and sold, and by its sale the means are provided 
 by which the indebtedness may be liquidated. The mer- 
 chant who in turn buys the manufactured product may 
 exchange his credit for the bank credit which he will use 
 to make the purchase; and when in turn he sells to the 
 retailer or to the consumer, he provides the means for the 
 liquidation of his indebtedness. That is the true business 
 of a modern bank. It swaps its credit, which has a wide 
 currency, for the credit of its customers, and the bank 
 deposits thus created become the medium of exchange for 
 the greater part of the transactions of commerce. 
 
6 THE CURRENCY PROBLEM 
 
 Obviously erroneous is the conception that so-called 
 deposits represent an actual deposit of money. When the 
 nature of fundamental banking transactions is understood, 
 the error is made plain ; but the conception is a persistent 
 one and confuses much discussion of banking questions. 
 There is comparatively little money deposited in a bank. 
 No person can say that he has money on deposit. What 
 he has is a credit on the bank's ledger. Such money as 
 the bank holds belongs to the bank rather than directly 
 to the depositor. 
 
 Resolved to its simplest analysis, the main figures in a 
 bank's statement are, on the one side, the totals of the 
 promises of individuals to pay the bank money ; and on the 
 other side, the promises of the bank to pay the individuals 
 money. The one results from the other ; the one has been 
 exchanged for the other. Now while this accumulation 
 of evidences of indebtedness — this total of credits, called 
 deposits — are promises to pay money, they become in 
 the. aggregate an amount vastly greater than all the money 
 that might by any possibility be available for such pur- 
 poses. It should be evident that it is not possible nor de- 
 sirable that a bank should keep itself in a position to pay 
 in money all its deposits if demanded at once ; just as it is 
 evident that its customers could not redeem in money 
 their promises to pay the bank if such demand should 
 be made by all banks at once. There is a cooperative 
 quality in the functions of a bank which should be under- 
 stood by the bank's customers and, whether understood 
 or not, must be accepted by them; as, for instance, in a 
 time of panic, when they have impressed upon their minds 
 that no matter how solvent a bank may be, it cannot pos- 
 sibly be in a position to redeem all the credits that are 
 evidenced on its books in cash at a given time. 
 
 This cooperative quality ought to be more clearly under- 
 stood by bank customers. They are clear enough in their 
 
THE MODERN BANK 7 
 
 desire to enjoy the advantages of the modern banking 
 system. They wish to convert their credit into a credit 
 that may be used as a generally acceptable medium of 
 exchange. They expect to share in the profits from the use 
 of capital temporarily idle in the hands of its owners. 
 They demand the facilities which the banking system 
 offers them for making credits instantly and cheaply 
 available at distant points from their places of business. 
 But even though they gain all these advantages, they fre- 
 quently see with indistinctness that they themselves must 
 play their part in the financial mechanism ; that they must 
 recognize the cooperative nature of the system and com- 
 prehend that so-called deposits are not deposits of money, 
 but are the book entries resulting from an interchange of 
 credits, and that they are of a nature where their wholesale 
 redemption at a particular time is impossible. 
 
 One of the principal functions of money is that of a 
 medium of exchange. In the modern system of finance, 
 however, money is so used only in petty transactions. In 
 transactions important in amount, money is seldom or 
 never the medium of exchange, the medium in such cases 
 being bank credits. As I have said before, it is estimated 
 that ninety-five per cent in value of all commercial ex- 
 changes are effected by an interchange of bank credits 
 rather than by the use of money. It is, of course, obvious 
 that a bank credit must be related to money and in the 
 ordinary course must be redeemable in money. It is 
 for this reason that a bank, after giving its customers 
 credit upon its books, permits its credits freely to be trans- 
 ferred from one customer to another, and agrees to honor 
 the credit upon demand by redeeming it in money. The 
 bank must keep itself in a position to fulfil that obligation 
 by having constantly in its vault an amount of money equal 
 at least to all of the ordinary demands that may be made 
 on it. All banks must, therefore, hold a cash reserve 
 
8 THE CURRENCY PROBLEM 
 
 against deposit liabilities. The minimum amount of that 
 reserve in relation to the deposit liabilities may be fixed 
 by law, as in the case of national banks, or it may be left 
 to the discretion of the bankers, as is permitted by the laws 
 of some states. Ordinarily it may be anticipated that the 
 amount deposited in a bank will approximately equal the 
 amount withdrawn. The reserves are held against those 
 unusual occasions when demands predominate. Reserves 
 are the only part of the bank's assets that can immediately 
 be used to pay off depositors. Should the predominance 
 of demand develop into a run on a bank, its ability to meet 
 the situation must depend upon its reserves, plus the amount 
 of its assets that may be quickly converted into cash. 
 
 Reserves, however, have another extremely important 
 function. They furnish a natural and necessary check to 
 inflation. Were there no immediate necessity for the 
 redemption in cash of any portion of a bank's promises 
 to pay, the bank, so long as it found customers who would 
 borrow and whose obligations it was willing to take in 
 exchange for its own, could go on indefinitely expanding 
 its liabilities. The relation which must be maintained 
 between total deposit obligations and cash reserves forms 
 a definite check upon such inflation. Under proper 
 banking methods deposits cannot expand without a pro- 
 portionate increase of reserves. 
 
 Conversely, supposing a bank's book credits to have 
 expanded to the limit permitted by the legal relation be- 
 tween deposits and reserves, then if the reserve be reduced 
 and the bank is without means to make good from outside 
 sources the deficit in reserve, it must meet the situation by 
 the calling of loans. It must induce its customers to can- 
 cel a portion of the bank's indebtedness to them, through 
 the bank, on its part, canceling an equal amount of the 
 customers' indebtedness to it. 
 
 This intimate relation between loans, deposits, and 
 
THE MODERN BANK 9 
 
 reserve is an extremely important one to comprehend. 
 You are, of course, familiar with the legislation concerning 
 it, and I shall recall it in but the briefest words. Under 
 our National Banking Law, banks in the threfe central 
 reserve cities are required to hold a reserve in lawful money 
 equal to twenty-five per cent of their net deposit liabilities 
 in their vaults. Banks in the forty reserve cities must also 
 hold a reserve equal to twenty-five per cent of their deposit 
 liabilities, but they may keep half of their reserve on de- 
 posit in banks in central reserve cities. Banks located 
 in neither the reserve nor the central reserve cities are 
 required to keep reserves equal to fifteen per cent of their 
 deposits, although only two-fifths of that reserve must be 
 in their vaults and three-fifths may be with their reserve 
 agents either in reserve cities or central reserve cities. 
 
 As one of the primary objects in the organization and 
 operation of a bank is to earn profits for the stockholders, 
 and as under ordinary conditions these profits are increased 
 in proportion to the size of the loan account of the bank, 
 it is natural that banks will habitually keep their loan 
 account as large as possible ; that is to say, they will swap 
 their credit for their customers' credit until the total credits 
 which have been created on their books bear as high a rela- 
 tion as the law will permit to the cash reserves which they 
 hold in their vaults. The governing factors are the ability 
 of the bank to make what it regards as safe and profitable 
 loans, and its ability to secure and to hold a cash reserve 
 which will sustain the proper legal ratio to the credits 
 which it thus creates and calls deposits. 
 
 Two consequences of enormous importance to the whole 
 community flow from the condition of affairs which has 
 been set forth. One is, that, to avoid dangerous inflation, 
 bank reserves must be maintained in gold or its equiva- 
 lent. It seems to me obvious that the danger which would 
 follow the plan, which many bankers favor, of counting in 
 
10 THE CURRENCY PROBLEM 
 
 reserves the notes of other national banks, would be ex- 
 treme. Such action would break off the interrelation of 
 volume of credit to the gold stock, and would open the 
 door to an inflation which would be limited only by the 
 bounds that the laws might place upon the issue of bank- 
 notes. These limits are now marked by the total of inter- 
 est-bearing obligations of the United States and the total 
 capital of the banks. Should the law remain unchanged, 
 it is easy to see how some national disturbance might 
 sharply increase the total of interest-bearing obligations, 
 create a basis for dangerous inflation, result in extraor- 
 dinary exports of gold, and bring our whole financial sys- 
 tem face to face with a crisis at the very moment when 
 such a crisis might be most dangerous to the life of the 
 nation. Whatever new legislation we may have, there 
 should always be and remain embodied in it the principle 
 that a bank reserve must be definitely related to the stock 
 of gold in the bank's vaults. 
 
 The other important consequence to which I have 
 referred follows from the fact that, while two of the funda- 
 mental qualities of money are that it must be a medium 
 of exchange and a store of value, its use for either of these 
 purposes is a varying one. Under the development of our 
 banking system very little money is ordinarily used as a 
 store of value. Occasionally, when confidence is disturbed, 
 distrust of banks widespread, and panic conditions prevail, 
 that function of money assumes the utmost consequence. 
 If the disposition to use money as a store of value increases, 
 that is to say, if hoarding becomes general, the entire 
 credit fabric may fall in ruins. 
 
 Under perfectly normal conditions the use of money as 
 a medium of exchange shows a considerable variation. 
 Nearly fifty per cent of the people of the United States are 
 engaged in agriculture. The results of their year's labor 
 are concentrated in the autumn's harvest. That harvest 
 
THE MODERN BANK 11 
 
 period marks an extraordinary demand for money as a 
 medium of exchange. It has been estimated that during 
 the autumn months two hundred million dollars additional 
 currency is in active use as a medium of exchange, for 
 which there is no such use during the remaining months 
 of the year. The total amount of cash in the vaults of 
 national banks is roundly seven hundred million dollars. 
 The relation which the extra demand for two hundred 
 million dollars of currency bears to the total reserve require- 
 ments of the national banks is thus seen to be extremely 
 important. 
 
 During, say, nine months of the year the medium of 
 exchange for ninety-five per cent of the transactions 
 of commerce are bank deposits. These credits answer 
 every purpose of safety and convenience and answer 
 those purposes in a degree far greater than would money 
 itself. During three months of the year a large portion of 
 the population of the country have a very considerable need 
 for a medium of exchange, but, having no relations with 
 banks, are unable to make use of bank credits in the form 
 of the ordinary bank deposit. A bank credit in the form 
 of a circulating note answers their purpose perfectly, but 
 our laws have been so contrived that the natural right of 
 a bank to issue its credit in the form that its depositor 
 most desires has been greatly curtailed. A prohibitory 
 tax prevents all but national banks from issuing circulating 
 notes under any conditions, while a national bank, in 
 order to issue its notes, must first part with its funds in 
 order to buy government bonds. As the bonds sell at a 
 premium, it must part with more funds than the amount of 
 circulating notes it will obtain. A governor of the Bank 
 of England has wisely said that success in banking depends 
 upon being able to distinguish between a note and a 
 mortgage. There is perhaps more of the correct science 
 of successful banking in that sentence than in any other 
 
12 THE CURRENCY PROBLEM 
 
 that was ever uttered. The business of a bank is the facili- 
 tation of the current operations of comnaerce, the exchange 
 of its credits for the credit of the merchant, and when it 
 departs from that and devotes its funds to the purchase of 
 long-term obligations in the form of mortgages and bonds, 
 even though they be government bonds, it has departed 
 from the banking ideal. 
 
 There may be reasons in the enormous development of 
 corporations and the great issue of corporate securities 
 which warrant a bank in departing from strictly commer- 
 cial business ; but there is no adequate reason in the natu- 
 ral laws which govern good banking to compel a bank to 
 tie up its funds in a long-term investment as a prerequisite 
 for issuing its circulating notes. As our laws stand, there 
 is no relation between the volume of circulating note& 
 and the commercial demand for currency. The motive 
 for issuing notes does not lie in the need for currency, but 
 in the profit arising from an investment in bonds whick 
 can in part be paid for by circulating notes obtained 
 against the collateral deposit of these bonds. 
 
 For more than forty years, under the operation of the 
 National Banking Act, we have seen the annual recurrence 
 of the fall demand for a larger amount of currency for use 
 as a medium of exchange. In no single year since the 
 passage of that act has the volume of notes shown a natural 
 tendency to increase with this fall demand and decrease 
 when it has ceased and currency become redundant. The 
 issue and retirement of national bank-notes is almost en- 
 tirely regulated by investment considerations affecting 
 government bonds, and is influenced but slightly by addi- 
 tional demands or decreased needs for currency. 
 
 We have noted that banks will normally increase their 
 loans and deposits to as large a total as the reserve which 
 they hold will legally permit them to do. At all times, 
 under normal conditions, reserves with the banks of the 
 
THE MODERN BANK 13 
 
 whole country stand at practically the legal minimum. 
 When the period comes that our currency is called upon 
 largely to increase the work which it does as a medium of 
 exchange, the only place from which this additional cur- 
 rency can come is the bank reserves, and a financial dis- 
 turbance follows with almost as much regularity as the 
 fall harvests follow the spring plantings. , 
 
 It would seem to be one of the most obvious of conclu- 
 sions that if banks were permitted to issue their credits in 
 the form of circulating notes, so restricted as properly to 
 safeguard the involuntary holder, the part which bank 
 credits play as a medium of exchange would be practically 
 uniform throughout the year, instead of there recurring 
 such a condition as now comes with every fall, where 
 two hundred million dollars must be taken for this pur- 
 pose from the bank reserves. 
 
 If the banks are unable to make good some part of this 
 vast withdrawal through gold imports or through treasury 
 deposits, the eflfect must be that they must reduce their 
 loans and deposits until they can bring about the legal 
 relation. If no fresh supplies of reserve money can be 
 obtained, it would mean that loans and deposits must be 
 reduced eight hundred million dollars in order again to 
 establish a legal relation after the withdrawal from the 
 reserve cities of two hundred million dollars of reserve 
 money. Of course, in practice part of the burden falls 
 on other than national banks, and part of the reserve loss 
 is made up from gold imports and treasury deposits ; but 
 after every device has been utilized to soften the blow, the 
 withdrawal of reserve money almost invariably leads to 
 disturbance and frequently to crisis in the money market. 
 
 There is another consideration affecting reserves, as 
 they operate under our banking laws, which is of the most 
 vital consequence. We have no banking system ; that is 
 to say, we have no related organization of banks. Instead 
 
14 THE CURRENCY PROBLEM 
 
 of that, we have fifteen thousand individual banks, each 
 a financial unit, each operated in regard to its own posi- 
 tion rather than with regard to its relation to the whole 
 situation. A few state banks have branches, it is true, but 
 in the main the statement of absolute individuality is cor- 
 rect. E pluribus unum has been conspicuously left out of 
 our banking legislation. 
 
 In a time of crisis two things are likely to happen. The 
 public becomes suspicious of the banks and resorts to 
 money as a store of value, converting its bank credits 
 into cash and hoarding the cash. At the same time, the 
 bankers are likely to become suspicious of one another as 
 well as apprehensive of the probable demands on the part 
 of their customers, and there begins a scramble for reserve 
 money. Each institution stands alone, concerned first 
 for its own safety, and using every endeavor to pile up 
 reserves without regard to what the effort may cost the 
 financial situation at large. 
 
 The result is an absolute immobility of reserves, and the 
 effect upon the general situation is probably far more dis- 
 astrous than that produced by all the private hoarding. 
 We are, at the moment, in the midst of such a situation. 
 Many banks are carrying reserves far in excess of their 
 needs. They will neither increase loans and thus build 
 up their deposit credits to a normal ratio to the reserve 
 they hold, nor will they remit their surplus reserve to their 
 reserve agents in the financial centers, for fear that they 
 might be unable to get the money back again promptly if 
 they should need it. It requires but a moderate develop- 
 ment of fear of such character to produce a most disas- 
 trous result. There are twelve to fourteen billion dollars 
 of deposits in all the banks in this country. The decision 
 on the part of the managers of each individual bank to 
 increase that bank's reserve but one per cent above the 
 normal would absorb one hundred and twenty to one 
 
THE MODERN BANK 15 
 
 hundred and forty million dollars, and would become 
 hoarding on a gigantic scale. 
 
 If our laws permitted branch banking by banks of issue, 
 such a condition could not arise. In respect to branch 
 banking our legislation is unique. The laws of every other 
 important nation encourage branch banking, and the 
 results of it have never tended to enslave the people, to 
 build up dangerous monopolies, or to increase the interest 
 rate. The result, in fact, has been quite the reverse. 
 Rates are kept uniform over a wide territory, the tendency 
 toward violent fluctuations is reduced, and the privileges 
 and benefits of safe banking are widely disseminated. I 
 believe that there are groundless fears in many directions 
 in regard to the possibility of evil from monopolies, but of 
 all commodities the last one that will ever be successfully 
 monopolized will be credit. 
 
 Throughout the terrific crisis which we have been ex- 
 periencing, affecting as it has every banking institution in 
 the United States, and bringing many of them to a point 
 where they were forced temporarily to suspend full cash 
 payments, we have heard no word of difiiculty beyond 
 the international border. Canada has been going through 
 a land speculation more important, when compared to her 
 total resources, than any speculation that has been engaged 
 in here for many years ; she has experienced all the diflScul- 
 ties that have followed the world-wide strain upon capital 
 which the industrial activities of the last two or three 
 years have engendered ; she has had no wiser bankers and 
 no more conservative business men than are the average 
 in this country : but there has been hardly a ripple on the 
 surface of her financial affairs, and to our shame we have 
 seen the banks of Canada perform a great service in mov- 
 ing the crops of our own Northwest, while we stood finan- 
 cially paralyzed, with our credit fabric shaken to the 
 foundation. 
 
16 THE CURRENCY PROBLEM 
 
 Is there not some obvious reason for this ? Is it not 
 apparent from the most casual reading of financial history 
 that business interests of the United States are subject to 
 periodical financial disasters which are avoided by the 
 business interests of every other important nation ? Is it 
 difficult to see that the reason for this lies in our laws, which 
 have warped and twisted the natural development of 
 banking out of normal lines ? We know that our bank- 
 note system grew out of an ingenious device of a harassed 
 government to sell bonds; that the need for the device 
 long ago disappeared, while the unfortunately hampering 
 laws relating to it still remain. 
 
 Some bankers are apt to answer any suggestion for fresh 
 legislation with the declaration that the present notes are 
 safe, and that they know of no requisite in banking greater 
 than safety. Such an answer is no answer at all. A bank 
 vault that cannot be unlocked may be safe, but it will 
 poorly answer the purposes of business. A bank-note 
 currency that has no relation to the demands of commerce 
 may be safe, but it has in it the elements of commercial 
 disaster, the extent of which cannot be measured by ordi- 
 nary totals. 
 
 Many of our lawmakers and bankers are ignorant of the 
 principles underlying this subject. If they were not, we 
 should long ago have had scientific and adequate legisla- 
 tion, or rather, perhaps, we never should have had the 
 legislation that has so warped and hampered the natural 
 development of our banking system as to make it what it 
 is to-day. 
 
 I believe that there is a grave responsibility upon the 
 financial metropolis of the country. New York City is 
 the financial center. The recognized financial leaders are 
 here, and the country may well look here for advice and 
 guidance. If it is true that the awful panic through 
 which we have been passing can in great measure be laid 
 
THE MODERN BANK 17 
 
 at the door of improper and inadequate legislation, and I 
 believe that to be true, then what a solemn responsibility 
 rests upon every one who is in a position to form public 
 thought and to influence national legislation. It is a 
 hopeful sign that this University recognizes its share in that 
 responsibility. 
 
 I have attempted the briefest outline of what I believe 
 , to be some of the principles that must be recognized in any 
 correct solution of the problems of banking and currency. 
 The more clearly these principles are apprehended, the 
 less likely is one dogmatically to believe that he has arrived 
 nt the only correct solution of the problems. 
 
 There are many solutions, in my opinion, that will 
 measure true by an application of these principles. I be- 
 lieve that one ideal solution would combine the Scotch sys- 
 tem of branch banks with the German system of a central 
 bank of issue. I recognize that there is profound political 
 prejudice against both of these ideas, but I believe that it 
 is a prejudice absolutely lacking in sound foundation. 
 That there are other solutions I have no doubt. The 
 mobility of reserves which is an essential to safe banking 
 and which is insured by the branch-banking system, may 
 possibly be secured through a utilization of clearing-house 
 xelationships. Such relationships have been signally 
 developed by the present financial crisis, and it is not un- 
 likely that a legalization and expansion of the powers 
 which clearing-houses have evolved in the stress and exi- 
 gencies of the crisis inay offer a solution which will be 
 more in harmony with the present political ideas than will 
 either the branch-banking system or the central bank. 
 
 The disposition to provide merely for an emergency 
 currency to be secured by bonds other than government 
 bonds, would, I believe, fail almost utterly to recognize 
 those principles which should govern a solution of the prob- 
 lem. Any solution that leaves the fifteen thousand banks 
 
18 THE CURRENCY PROBLEM 
 
 of this country compelled to prey upon one another in 
 a time of panic, with reserves immobile, and with man- 
 agement isolated and having such secondary regard for 
 the general welfare, will fail of its ultimate purposes. 
 
 There are some sound objections to extending to every 
 bank in the national banking system the power of currency 
 issue against assets. If completely adequate redemption 
 facilities were provided, however, I believe that the danger 
 would be minimized, if, indeed, it would not entirely 
 disappear. That the result aimed at, a currency expand- 
 ing and contracting with the larger or smaller need for 
 currency as a medium of exchange, will be better met by 
 a central bank having the power of issue and covering its 
 notes in part by a gold reserve and in part by legitimate 
 commercial paper, created against actual commercial 
 transactions, I have no doubt; nor do I believe that the 
 political prejudice against a central bank will be found to 
 be so serious as is apprehended. If a well-considered and 
 definite plan for a central bank were presented for public 
 discussion by those whose duty it is to offer a proper solu- 
 tion of the problem, much of the political prejudice would 
 disappear. 
 
 The subject is technical. Opinions formed without a 
 grasp of fundamental principles and conditions are without 
 value. The verdict of the uninformed majority gives no 
 promise of being correct. In this country we have had one 
 great campaign of financial education. The majority of 
 the voters of the nation now know that the free and un- 
 limited coinage of silver was a financial fallacy. If to 
 secure proper banking legislation now it is necessary for a 
 similar campaign of public education, it is time it were 
 begun. 
 
THE STOCK EXCHANGE 
 
 AND 
 
 THE MONEY MARKET 
 
 BT 
 
 THOMAS F. WOODLOCK 
 
THE STOCK EXCHANGE AND THE MONEY 
 
 MARKET 
 
 The subject of this address is the Stock Exchange in 
 relation to the money market. It is desirable, however, 
 first to recall certain fundamental facts concerning what is 
 commonly known as the money market. The essential 
 function of banking is the mobilization of capital in the 
 form of banking credit for use in the multifarious activities 
 of industry and commerce. Banks, as Mr. Vanderlip 
 pointed out in the preceding address, in a sense bring 
 credit into practical being and set this credit to work in 
 various ways. Taking the banking business of the coun- 
 try as a whole, the largest use is found for credit in bringing 
 about or assisting the actual production, manufacture, 
 transportation, and distribution of commodities of general 
 use, such as food, fuel, and clothing. 
 
 Credit of this kind is made in the shape of commercial 
 paper, which is discounted by the banks, this paper being 
 simply the note of an individual or individuals or of a cor- 
 poration — a promise to pay on a certain date. The 
 general theory of commercial paper is that it represents 
 borrowing of a purely temporary nature for a purpose 
 purely temporary in character. This purpose is, stated 
 very simply, the financing of commodities in process of 
 manufacture and distribution up to the point where they 
 enter into consumption, it being understood that the con- 
 sumer's purchase provides the means of repaying the credit 
 borrowed. 
 
 In other words, commercial paper provides a very large 
 part of the business community with its working capital, 
 
 21 
 
22 THE CURRENCY PROBLEM 
 
 and the capital or credit thus provided goes for the most 
 part into the materials of production, being returned by 
 conversion of those materials into usable commodities 
 and the sale thereof. It is contrary to the general nature 
 of things that the proceeds of temporary loans should be 
 used as fixed capital and sunk in the instruments of produc- 
 tion, such as land, buildings, and machinery, and the like, 
 whence in the ordinary course of events it is not quickly 
 recallable. It must be remembered that banks cannot 
 safely tie up depositors' money in fixed loans of this kind, 
 for they are always liable to be called on by those depositors 
 for payment. As a rule, a bank arranges its purchases of 
 commercial paper in such a way that there is a constant 
 process of repayments going on — a constant stream of 
 maturities falling in. This credit is, of course, put out 
 to work again as fast as it comes in, but it is the essence 
 of sound commercial banking that it should periodically 
 return to its source. 
 
 Probably two-thirds at least of the banking credit of the 
 United States in use in the form of bank loans is employed 
 as working capital in this way and is represented in bank 
 safes by commercial paper. And while there is at times 
 — as in the last year or two probably — a certain amount 
 of unwise temporary borrowing for the purpose of fixed 
 investment, the great bulk of this credit truly represents 
 working capital employed in the preparation and distribu- 
 tion of commodities of general use. Next to commercial 
 paper, the principal use of banking credit in the United 
 States is found in loans upon securities. These loans 
 differ fundamentally in more respects than one from loans 
 which are made in the form of commercial paper. In 
 the latter case a bank advances credit to an individual or 
 individuals without security, trusting entirely to what is 
 commonly called the individual credit of the borrower. 
 In the case of loans on securities the bank takes, not 
 
STOCK EXCHANGE AND MONEY MARKET 23 
 
 merely the borrower's note, but also collateral security in 
 the form of stocks or bonds of corporations, states, or mu- 
 nicipalities. Thus the latter is a secured loan in the ordi- 
 nary sense of the word, while the former is not. The bank, 
 moreover, in the case of security loans, is secured further 
 in that it does not advance to the borrower the full market 
 value of the collateral security deposited, but only a portion 
 thereof. The practice is that the borrower deposits secu- 
 rities to the extent of at least twenty per cent market value 
 over the amount of the loan, and that this margin of twenty 
 per cent is kept up during the life of the loan, whether it be 
 a call loan or a time loan. Thus in the case of loans on 
 securities, the bank which makes the advance is fortified, 
 not merely by the note of the borrower, but also by securities 
 of a market value twenty per cent greater than the amount 
 of the loan. As a matter of fact it may be said that in 
 practice the reliance of lenders is apt to be mainly on the 
 collateral of the borrower. 
 
 The character of a security from the point of view of the 
 banker who lends upon it is determined by the ease or cer- 
 tainty with which it can be sold — in other words the de- 
 gree of its convertibility. Consequently the existence of a 
 market for securities is the first requisite for any system 
 of lending on securities. Without such a market there 
 would be very little credit used in this way — and for that 
 matter we may say that there would probably be very 
 few securities in existence. For while the corporation 
 idea is quite practicable — and, indeed, is to some extent 
 practised — in the case of enterprises where but a few 
 men are concerned and where ownership of interest is 
 permanent and unchanging, its great extension has been 
 rendered possible only by enlisting the active interest of 
 the multitude, and for this a wide and free market is an 
 indispensable piece of machinery. Hence the existence 
 of the stock exchange, without which the modern system 
 
24 THE CURRENCY PROBLEM 
 
 of corporate enterprise — the railroads being the most 
 notable example — would certainly not have attained to 
 anything like its present growth. 
 
 Corporation securities, whether evidences of ownership 
 such as stocks, or evidences of debt such as bonds, prac- 
 tically all represent capital mobilized for the purpose of 
 fixed investment in the instruments of production and dis- 
 tribution of commodities such as land, machinery, rail- 
 roads, buildings, and the like. Just as a bank mobilizes 
 capital for temporary use in discounting commercial paper, 
 a corporation mobilizes capital for permanent use in fixed 
 plant. It divides this capital into convenient shares, 
 which are readily transferable from one owner to another, 
 thus enabling small capitalists to invest in enterprises 
 which would otherwise be closed to all who could not 
 command capital in very large amounts. Just as com- 
 modities of general use are manufactured with a view to 
 their consumption by individuals, so we may also say that 
 the ultimate destiny of securities is lodgment in the hands 
 of people who practically consume them, namely, investors. 
 For to all intents and purposes securities placed with in- 
 vestors may be considered as more or less consumed. At 
 least they are removed from what may be called stocks on 
 hand. The investor buys securities in order to obtain a 
 return from them, and usually also with the hope that they 
 will increase in value while in his hands. The greater 
 the security of the yield from a bond, the greater the sta- 
 bility of dividends on a stock, the more attractive it is from 
 the investor's point of view ; and we may set it down as a 
 principle that, according as the margin of safety increases 
 in the case of bonds and according as the earning capacity 
 represented by stocks increases, both bonds and stocks 
 tend to be more largely consumed by investors. 
 
 The production of commodities of general use is carried 
 on by manufacturers ahead of current needs. Goods are 
 
STOCK EXCHANGE AND MONEY MARKET 25 
 
 made in advance of the actual demand for them. They 
 are carried in stock pending their sale to the retailer, 
 and frequently are made many months ahead of the time 
 when they are needed for consumption. In other words, 
 the needs of the consumer are carefully studied in advance 
 and provided for as far as the ingenuity of man can provide 
 for them. What is true of commodities is in the main true 
 of securities. The methods of that portion of the financial 
 world which is generally concerned with the making and 
 the merchandizing of securities are such that there is 
 always in existence a large mass of securities, both stocks 
 and bonds, which are intended ultimately for consumption 
 by investors. I must not be understood as saying that 
 securities are always created in good faith and with the 
 idea that they will ultimately qualify for the conservative 
 investor, — very far from it. But I feel entirely safe in 
 saying that securities are all created originally with the idea 
 that they can be sold for money, and they cannot be sold 
 for money unless the buyer thinks that he at least can sell 
 them again. This he cannot do unless they possess, or 
 appear to possess, real value, actual or potential; that is, 
 unless they have, or seem to have, the power to return inter- 
 est or dividends. The only value that a security can have 
 is, in the long run, the kind of value that appeals to the in- 
 vestor; namely, that which rests on the capacity of these 
 securities to yield interest or dividends. Not even a specu- 
 lator will buy a security of any kind unless he thinks he 
 sees some potential value in it, and this value must have 
 ultimate reference to its income-paying capacity. There 
 must be some potentiality of this kind, however remote ; 
 otherwise the securities cannot be sold even to a speculator, 
 and if they cannot be sold they will not be made. 
 
 By reason of these conditions there is always in existence 
 a large mass of securities which have been created with an 
 eye to their ultimate sale to and consumption by investors. 
 
26 THE CURRENCY PROBLEM 
 
 and this mass of securities may be regarded as undergoing 
 a process of preparation for the investor. In this mass 
 there will be bonds and stocks of every kind and every 
 grade of value, ranging from new bond issues of the most 
 undoubted character which are ready to pass almost imme- 
 diately into consumption, down to common stocks which 
 possess at the best barely enough potentiality of ultimate 
 value to warrant an occasional speculative purchaser 
 "taking a flyer in them." It may be here pointed out, 
 moreover, that in the preparation of securities for investors 
 time is a more or less necessary element : a bond must be 
 seasoned to some extent by regular payment of coupons 
 — unless it be a bond of the highest character made by a 
 borrower of the first rank — before it finally finds its way 
 into a permanent home; and a stock also requires time 
 to demonstrate its ability to yield regular dividends at a 
 satisfactory rate. Again, speculation, that most potent 
 of all factors in human activities, operates so as to bring 
 into existence the securities at the very earliest moment that 
 a potentiality of value can be demonstrated, and it takes 
 time to develop this potentiality into an actuality. The 
 merchandizing and distributing of securities give employ- 
 ment to a large class of people, who have a most elaborate 
 system and who carry — as jobbers, wholesalers, and dealers 
 at retail — a very large stock of securities to suit all tastes 
 from the most speculative to the most cautious. The term 
 "Wall Street" is commonly used to describe this class in 
 the community. It includes all who make a business of 
 manufacturing, distributing at wholesale or retail, and 
 speculating in securities of all kinds. 
 
 Just as the manufacturers, distributors, and dealers 
 in commodities of general use must of necessity be bor- 
 rowers of money on a large scale, so is Wall Street necessa- 
 rily a borrower of money on a large scale, with securities as 
 collateral, pending the placing of these securities with the 
 
STOCK EXCHANGE AND MONEY MARKET 27 
 
 investor as the ultimate consumer. The process, therefore, 
 of making securities and merchandizing them after they 
 are made gives employment to an entire class of people, all 
 of whom must borrow money. At every stage of the pro- 
 cess the use of banking credit is required, from the origi- 
 nal syndicate which forms the corporation at the start or 
 underwrites the issue, to the dealer who sells to the inves- 
 tor. And to this is due the fact that so large a sum of bank- 
 ing credit is loaned on collateral security. That this credit 
 can be safely loaned in this way is due to the existence of a 
 free and wide market for securities, a market which is 
 supplied by the New York Stock Exchange. 
 
 We need not stop to consider in any detail the constitu- 
 tion of the Stock Exchange. All that is necessary to note 
 is that it is ^ purely voluntary association, depending upon 
 no monopoly privilege other than that which nature grants 
 to the most efficient, and that it has attained to and holds 
 its position by right of many scores of years of efficient 
 service. Other exchanges exist elsewhere in the United 
 States, but all are practically tributary to, and dependent 
 on, the New York Stock Exchange as the primary market 
 for securities in this hemisphere. This body has taken and 
 habitually enforces every possible precaution to protect 
 the freedom of its market and to prevent — so far as it can 
 be prevented — its use for fraudulent or improper pur- 
 poses. It cannot prevent rash speculations, it cannot 
 guarantee the value of securities admitted to dealings on 
 its floor ; but it can and does do all that can be done to make 
 and to keep a fair market for securities on its list, a market, 
 that is to say, where buyer and seller can meet and do busi- 
 ness openly at a fair market price. Whatever its faults 
 may be, it is at least in every sense of the word a true mar- 
 ket for securities. 
 
 In two things New York differs from every other finan- 
 cial center of the world. One is that the business of the 
 
28 THE CURRENCY PROBLEM 
 
 Stock Exchange is conducted on the basis of daily settle- 
 ments, whereas practically all the important exchanges of 
 Europe do business on the basis of monthly or semi- 
 monthly settlements. The other is that in New York 
 there is a "call-money" market of large dimensions, the 
 like of which exists nowhere else on the globe. The 
 latter is rendered possible by the former and could not 
 exist without it. The rules of the New York Stock Ex- 
 change permit contracts which may be called futures or 
 time bargains under certain conditions. Stocks can be 
 bought or sold at "sellers'" or "buyers' option" for thirty 
 or sixty days. As a matter of fact, however, practically all 
 the business is conducted either for cash or as it is termed 
 "regular way." Transactions for cash are settled on the 
 day the transaction is made. Transactions made "regu- 
 lar way," which account for nearly ninety-nine per cent of 
 all the transactions made on the Exchange, are settled on 
 the day following their making. The rules require that the 
 seller of securities shall make delivery of them on the next 
 full business day following the sale, not later than 2.15 p.m. 
 If at that time, which is known as "delivery hour," the 
 seller has not delivered the securities which he has sold to 
 the buyer, the buyer can, if he so pleases, enforce delivery 
 by having the securities bought in on the Stock Exchange 
 " under the rule," at the cost of the seller who failed to 
 make delivery. If he does not do this, the transaction goes 
 over to the next business day, when the same conditions 
 rule. It may be stated here that the clearing-house system 
 now in use for many years by the Exchange saves an im- 
 mensity of trouble to everybody by eliminating the duplica- 
 tion of deliveries. It in no way, however, affects the main 
 principles of the case and hence need not be considered 
 here. The chief point is that the New York Stock Exchange 
 furnishes a free market for securities on the basis of cash 
 at twenty-four hours. Consequently call loans on security 
 
STOCK EXCHANGE AND MONEY MARKET 29 
 
 collateral are possible, for the stock market furnishes 
 the means of paying loans if liquidation is necessary. 
 
 You are doubtless familiar with the nature of a call 
 loan. It differs from a time loan merely in that repay- 
 ment can be demanded by the lender on call or tendered 
 by the borrower at will. The only restriction which is 
 observed in the matter of call loans is that it is not custom- 
 ary in Wall Street to demand or to tender payment of 
 call loans on any day after 1 p.m. on that day. A time 
 loan, of course, is made for a definite period at a definite 
 rate of interest and has a definite maturity; the interest 
 rate on call loans may change from day to day. The 
 existence of a large call-loan market is the feature which 
 is characteristic of the New York money market, which 
 distinguishes it from other money markets, which most 
 definitely expresses the relations of the Stock Exchange 
 with the money market, and which forms the main subject 
 of present consideration. 
 
 Of the total mass of credit used in security loans in con- 
 nection with the operations of the financial community, 
 probably two-thirds at least is loaned "on time." Houses 
 which are engaged in the process of merchandizing securi- 
 ties — chiefly bonds — naturally have to provide for their 
 requirements mainly in this way, as their stock consists 
 largely of securities which are not quickly convertible 
 into cash because speculation is a comparatively small 
 factor in the market therefor. Houses and individuals 
 which are engaged in semi-speculative operations such as 
 promotions are governed by the same necessities and must 
 be sure of their resources; at least they cannot safely 
 place themselves in a position where they may have to 
 find large sums of money at a day's notice. Stock-bro- 
 kerage houses — commonly known as commission houses 
 — who conduct a general investment and speculative 
 business for clients also find that it is very advisable to 
 
30 THE CURRENCY PROBLEM 
 
 provide themselves with "time money" to the extent of at 
 least one-half of their normal requirements. If a house 
 of this character has a general borrowing capacity of 
 five million dollars — which means a capital of some- 
 where between one and one and a half millions — it will 
 in normal times, when doing business up to its capacity, 
 carry probably two million dollars of time money, relying 
 on the call-money market for the balance. Generally 
 speaking, it is true that in times of extreme monetary 
 ease, when bank reserves are large, the proportion of money 
 loaned on security time loans tends to decrease because 
 borrowers are willing to take the chance of daily borrow- 
 ing at low rates. Also when the money market is notably 
 stringent, the proportion borrowed on call tends to rise 
 because lenders are loath to make fresh time loans as the 
 old ones mature, preferring to keep their money out on 
 call. Thus the volume of call loans tends to swell at 
 either extreme of money rates, in the one case being forced 
 on the market by lenders who are overstocked, and in the 
 other case being eagerly sought by borrowers who must 
 have accommodation. This is one reason for the wide 
 fluctuations in call-money rates recorded every year. We 
 shall presently see that there are others. 
 
 Time loans in the financial district are privately made, 
 a large business being done by money brokers who put 
 out money on commission for the lenders. Their task is 
 to seek borrowers or lenders, as the case may be, and to 
 bring them together. Of course a great many loans are 
 made without the intervention of brokers at all, the bor- 
 rower himself "shopping" for his money and making his 
 own negotiation. For "call loans" there has been estab- 
 lished on the Stock Exchange a regular and open market, 
 where a large business is done every day in normal times. 
 And while a large call-loan business is done privately out- 
 side of the Exchange, the transactions at the money post 
 
STOCK EXCHANGE AND MONEY MARKET 31 
 
 on the floor have a large influence in making the ruling 
 rates. The call-money market on the Stock Exchange 
 usually opens at about 11 o'clock on full business days. 
 Saturday being a half day's business only, there is no de- 
 livery of securities on that day, and Friday's and Saturday's 
 transactions are settled on the following Monday. There 
 is no call-money market on Saturdays. At about 11 o'clock 
 the banks in New York City know more or less what their 
 balances are as a result of that day's clearings, and by that 
 time they have called such loans as they need to call in 
 order to meet their requirements if they have such require- 
 ments. Sometimes occasions arise when they have to 
 call loans for payment a little later in the day, but as a rule 
 they know more or less how they stand at about 1 1 o'clock 
 and have acted accordingly. Brokers also know more or 
 less what the day's requirements are and whether they 
 have "money over" or need money. At about 11 o'clock 
 they gather at the money post on the floor of the Stock 
 Exchange and the business of borrowing and lending 
 begins. Brokers are there, representing banks and insti- 
 tutions with balances to lend ; other brokers are there with 
 their own surplus, — balances which will not be needed 
 that day and which represent perhaps their own private 
 capital that is temporarily unemployed or money borrowed 
 on time for which they have no present use. A record of 
 an informal character is kept at the post of the loans as they 
 are made, with amount and interest rate, and a fair average 
 of the transactions up to about 11.30 a.m. is struck; and 
 the fair average rate resulting from these transactions is in 
 normal times taken as the renewal rate on standing loans 
 for that day. Of course, this rate is really determined in 
 the main bv the banks themselves, for the amount of bank 
 money at the post really makes the market rate. Brokers 
 who have call loans standing with each other renew these 
 loans for the day at this renewal rate. The banks them- 
 
32 THE CURRENCY PROBLEM 
 
 selves make their own renewal rates directly with their own 
 borrowers, and the renewal rate at the Exchange governs 
 principally the loans between Stock Exchange firms. 
 While there is, as a rule, general correspondence between 
 this renewal rate on the Exchange and renewal rates made 
 by banks and other institutions, it not infrequently hap- 
 pens that the renewal rate on the Exchange, especially in 
 times of stringency, tends to be somewhat lower than the 
 rates made by the banks. 
 
 By reason of the unwritten law in Wall Street that call 
 loans shall not be disturbed after 1 p.m. borrowers know 
 at that hour how they stand as regards existing loans. 
 But it may happen that securities which they expect to 
 receive may not be delivered to them, or that securities 
 which they expect to deliver cannot be delivered on that 
 day, and at 2.15 p.m., when the delivery of securities ceases 
 for the day, they may have "money over" or may "need 
 money." As a consequence there is, around this time, 
 usually a fresh outburst of activity in money after two hours 
 of dullness, those brokers with "money over" supplying 
 the needs of those who want money, and by 3 p.m., the 
 process is completed for the day. 
 
 In ordinary times the amount of money loaned at the 
 money post in the Exchange is not very large. But in 
 abnormal times, when there is disturbance in the money 
 market and activity in the security markets, very large 
 amounts are borrowed and lent on the floor. There were 
 days during the recent stringency when probably twenty 
 or thirty million dollars were borrowed and lent, and when 
 the money post in the Exchange was the storm center 
 of the entire disturbance. This was notably the case on 
 that afternoon when the famous twenty-five million dollars 
 bankers' pool was hurriedly formed to supply the needs 
 of the Stock Exchange. In point of fact, it may be said 
 that the money market on the Exchange is a very faithful 
 
STOCK EXCHANGE AND MONEY MARKET 33 
 
 index or barometer to the call-loan market generally ; and 
 when little business is done there, it means that there is 
 little change in conditions, standing loans being renewed 
 instead of shifted. Whenever there is a general disturb- 
 ance or shifting of call loans, it is quickly reflected on the 
 floor of the Stock Exchansre. 
 
 o 
 
 One disadvantage sometimes results from the workings 
 of an open call-money market on the floor of the Stock 
 Exchange, and it arises from an extension of the principle 
 of equality in the matter of credit so far as purchase or 
 sale of securities is concerned — which is one of the funda- 
 mental principles of the Exchange — to the matter of 
 borrowing money, which is quite another thing. - The rate 
 for strong borrowers with good collateral is frequently 
 made by the bids of weak borrowers with poor collateral, 
 which should not be the case, even when, as I have pre- 
 viously pointed out, the main reliance of lenders is apt to 
 be on collateral. Individual credit should count for some- 
 thing at all times in the money market, and to the extent 
 that the Stock Exchange system of call-money borrowing 
 and lending tends to obscure this, it may be considered as 
 defective. 
 
 We have seen whence comes the demand for loans on 
 securities. It comes from the people who, as promoters, 
 syndicators, merchants, jobbers, brokers, or speculators, 
 are carrying that floating mass of securities of all kinds 
 (ranging from savings-bank bonds to non-dividend-paying 
 stocks) which has not as yet gone into the hands of per- 
 manent investors, whether they be corporations or indi- 
 viduals. Whence comes the money that is loaned to these 
 people on these securities ? 
 
 New York's position as the financial center of the United 
 States is, of course, the principal answer to that question. 
 This city, offering employment for capital under condi- 
 tions of almost absolute safety, naturally attracts capital 
 
34 THE CURRENCY PROBLEM 
 
 very strongly as against any other section. Even were 
 there no National Bank Act creating reserve cities, New 
 York's banks would naturally tend to become to a very 
 large extent the depositaries of the nation's surplus cash. 
 Under the National Bank Act New York is in effect the 
 permanent holder of a great deal of cash, representing a 
 portion of the reserves of country banks deposited with 
 New York national banks at interest. This country 
 money is one of the most important factors in determining 
 money rates in New York. Besides this there is, of course, 
 a large volume of private capital of all sorts in New York 
 which finds employment in connection with the Stock Ex- 
 change. Insurance companies, savings banks, large cor- 
 porations whose principal offices are in New York, all these 
 add their quota to the great volume of banking capital 
 available in this city. But probably the country bank 
 money, as it is called, is the most powerful determinant of 
 call-money rates in the long run. Every year there are 
 certain important pulsations of money circulation in the 
 United States, arising chiefly from the planting and har- 
 vesting of the crops in the spring and the fall. To carry 
 through these operations and the moving of the crops when 
 harvested, cash has to be sent in great volume into the 
 country, where it is scattered as a fine rain, so to speak, 
 over a large area, paying farm hands for their labor and 
 farmers for their crops. This money returns again grad- 
 ually through the small streams and rivers of trade to the 
 reservoirs or storage lakes where it is kept until it is again 
 needed. New York is such a storage lake ; it is drawn 
 down in the spring and in the fall, and it is filled up in 
 the summer and the winter. New York also distributes 
 most of the interest and dividend money disbursed by the 
 large corporations, which makes a small monthly pulsation 
 in circulation, and it also is the center of mercantile settle- 
 ments — to say nothing of its being the foreign exchange 
 
STOCK EXCHANGE AND MONEY MARKET 35 
 
 market of the country as well. The play of the various 
 factors connoted in these things upon the call-money 
 market, which is also acted upon by the forces of specula- 
 tion in the stock market, necessarily makes the call-money 
 market a most delicate and sensitive piece of machinery, 
 the equilibrium of which tends to be considerably unstable, 
 except in periods of general business inactivity, when large 
 masses of capital are out of employment. 
 
 Inasmuch as the call-money market consists largely of 
 the fluctuating surplus cash of lenders and the fluctuating 
 requirements of borrowers, it is quite natural that it should 
 fluctuate violently, for it is subjected to an ebb-and-flow 
 movement of dimensions very large in proportion to its 
 total volume as a result of the movements of cash already 
 referred to. Moreover, it must be remembered that there 
 is no central governing influence in the call-money market, 
 either in the shape of concentration of borrowing or in that 
 of concentration of lending. The open market estab- 
 lished on the floor of the Stock Exchange cannot be con- 
 sidered a governing influence at all in the true sense of the 
 word. There is open competition among lenders at all 
 times when money is easy, and only in the face of panic 
 is there, as a rule, anything like concerted action on their 
 part. In times of ease competition among lenders is very 
 keen in character and has the effect, in all probability, of 
 driving rates lower than they would otherwise go. Con- 
 versely, when money commences to become stringent with- 
 out the danger point of panic having been reached, the 
 absence of concerted action on the part of lenders leads to 
 perhaps unnecessary alarm and unnecessary shifting of 
 loans. This brings about an unnecessary restriction of 
 accommodation which would be avoided if concerted action 
 were the rule. So far as borrowers are concerned, of 
 course, competition becomes extremely active whenever 
 the market hangs out danger signals. The absence of a 
 
36 THE CURRENCY PROBLEM 
 
 central governing factor in the money market such, for 
 example, as is the Bank of England in London, the Bank 
 of France in Paris, or the Imperial Bank of Germany in 
 Berlin, is very noticeable and must be considered one of 
 the factors which tend to aggravate the fluctuations in call 
 money. Of late years, moreover, another somewhat ag- 
 gravating influence has been felt in the shape of what have 
 come to be known as "out-of-town" bank loans. These 
 are loans made by out-of-town institutions acting through 
 New York banks and trust companies, these banks and 
 trust companies lending money on instructions from the 
 out-of-town banks and holding as custodians for account 
 of these banks the securities deposited as collateral for the 
 loans made. 
 
 This practice grew up several years ago as a result of the 
 desire of out-of-town banks to get the benefit of the high 
 call-money rates ruling at the Exchange. Instead of leav- 
 ing their money on deposit with the New York insti- 
 tutions, allowing the latter to lend this money for their own 
 account, the out-of-town banks concluded to make direct 
 loans themselves. In these cases the New York institution 
 acted simply as agent under instructions, having no control 
 over the loans made and being simply the temporary de- 
 positary of collateral. This practice first attracted atten- 
 tion as a dangerous element in the situation in the summer 
 of 1902. At that time a quiet investigation developed the 
 fact that something over one hundred million dollars was 
 being lent in this way by out-of-town institutions, subject to 
 the call of those institutions. It was a time of consider- 
 able stringency in the money market, and New York 
 bankers felt that the existence of a mass of credit of these 
 dimensions not subject to control had within it the po- 
 tency of disaster. These loans do not figure in the weekly 
 bank statement and, of course, are supported by the New 
 York cash reserve. It is not generally known that a year 
 
STOCK EXCHANGE AND MONEY MARKET 37 
 
 ago the same condition existed, but to a much greater ex- 
 tent. In December of last year it was estimated that over 
 four hundred million dollars of money were being loaned 
 in New York City for account of country institutions, over 
 which loans the New York banks had no control whatever. 
 In view of what has happened in the last three months we 
 may be truly grateful that the storm did not break as it 
 might have broken twelve months ago, instead of coming, 
 as it did, after many months of very severe liquidation, 
 during which these direct loans by country banks were 
 enormously reduced. 
 
 We may summarize, therefore, the factors which com- 
 bine to make the call-loan market a very unstable thing in 
 the matter of rates as follows : First, the fluctuations caused 
 in the volume of credit naturally offered at call by the sea- 
 sonal ebb and flow of cash in connection with agricultural 
 needs. Second, the lack of unity of action on the part of 
 lenders generally. Third, the intervention of outside lend- 
 ers acting independently of the local banks ; and fourth, 
 the fact that the call-loan market is really the storage place 
 for the nation's surplus credit, and consequently has to 
 take up all the stress resulting from changes of stress at 
 other parts of the credit system. To these factors we 
 must add another most powerful factor at times, and that 
 is speculation in the stock market. We have already noted 
 the fact that according as securities more clearly demon- 
 strate the stability of their values they tend to pass out of 
 the floating mass of securities into the hands of investors. 
 It is necessary now to note certain other general truths with 
 respect to consumption of securities by investors. The first 
 is that every panic or every severe decline in prices brings 
 investors into the market with their cash, looking for bar- 
 gains. This year has furnished a very notable demonstra- 
 tion of this fact, for "odd lot" buying has been a conspicu- 
 ous feature during the very worst times of the panic. 
 
38 THE CURRENCY PROBLEM 
 
 The second is that speculation carried to unwise extremes 
 in advancing prices has a precisely contrary effect, tending 
 to attract securities from investors' hands back into the 
 floating mass whence they were taken by those investors. 
 Remembering that investors' purchases, by taking securi- 
 ties away from Wall Street, enable repayment of money 
 borrowed on those securities, and conversely that investors' 
 sales force increased borrowing by Wall Street, it is clear 
 that here is one reason why speculation when it becomes 
 active tends to absorb more money in security loans. An- 
 other reason — fully as potent — is that in a period of ac- 
 tive speculation there is much shifting of loans, and in a 
 period of rising prices every time a loan is shifted it means 
 the borrowing of more money on the same securities, for 
 rising prices mean more security in the same certificate or 
 bond. Thus, speculation in securities tends to attract 
 securities to "Wall Street" to begin with and causes, in 
 addition, the same securities continually to absorb more 
 credit, which, of course, has a powerful effect upon call- 
 money rates. 
 
 Conversely, a period of liquidation in securities, such as 
 we have had this summer and fall, tends to attract investors 
 and, in addition, by lowering prices, to relieve a certain 
 amount of credit on the shifting of loans — the whole 
 tending to lessen the strain on the call-money market, other 
 things, of course, being assumed to be equal. 
 
 Viewing the whole matter generally, so far as the call- 
 money market is concerned, it is not difficult to under- 
 stand why it tends to swing constantly to one or to the 
 other extreme, namely, pronounced ease or downright 
 stringency. It is a curious fact, proved by experience, 
 that there is practically no middle course for it. Rates 
 are either down to two per cent or thereabouts or twenty 
 per cent and upwards. Rates on call loans rarely remain 
 for any length of time around four to six per cent. They 
 
STOCK EXCHANGE AND MONEY MARKET 39 
 
 either quickly fall away or quickly rise above these figures ; 
 it is usually a feast or a famine for the borrower. The 
 fundamental reason is, as we have seen, the fact that the 
 New York money call-loan market is the essentially mobile 
 surplus portion of the nation's banking credit, whose volume 
 is relatively small in comparison to the total mass and upon 
 which very powerful strains are exerted, most of the time, 
 in either direction. 
 
 What general judgment are we to pass upon this system 
 of call loans and its bearing upon the business community 
 at large ? Is it on the whole a good system ? 
 
 I shall not venture to urge upon yo^ any opinion of my 
 own, but will ask you to note certain plain facts. The first 
 is that its very existence depends upon the system of daily 
 settlements of the New York Stock Exchange, without 
 which no call-loan market would be either necessary or pos- 
 sible. The second is that both in the case of security 
 prices on the Stock Exchange and in the case of call-loan 
 rates, this daily settlement system tends to make fluctua- 
 tions more violent than otherwise might be the case. The 
 third is that the wide attention necessarily attracted by 
 violently fluctuating call-money rates must, to a consid- 
 erable extent, influence money rates generally, not merely 
 as regards time loans or securities, but also as regards 
 commercial paper. For in the making of rates on money 
 loans sentiment is a most powerful factor, and sentiment 
 is necessarily very sensitive to violent changes in call 
 money. 
 
 On the other hand, there can be no doubt that the system 
 of daily settlements on the Stock Exchange is a great re- 
 straining influence upon reckless gambling, beyond the 
 means of either the speculator or his broker, which in a 
 country like this, where speculation is so powerful a factor 
 in enterprise generally, is no small benefit. 
 
 The main thing that seems to be needed is some stabilizing 
 
40 THE CURRENCY PROBLEM 
 
 force in the call-money market, and, if I may be permitted 
 the suggestion, it might be possible to find this force in some 
 method of concerted action by lenders of money in which 
 the bankers' clearing-house might play a part. I am not 
 prepared with a plan and shall not presume to make sug- 
 gestions as to details, but there does not seem to me to be 
 any fundamental difficulty in adjusting the daily supplies 
 of call money to the daily needs without unrestricted com- 
 petition on both sides, and without wild fluctuations in 
 money rates, which are a perennial source of amazement, 
 and, I fear, contempt, to our foreign banking friends. 
 
GOVERNMENT CURRENCY 
 
 vs. 
 
 BANK CURRENCY 
 
 BY 
 
 A. BARTON HEPBURN 
 
GOVERNMENT CURRENCY VS. BANK 
 CURRENCY 
 
 I. The Subtreasurt 
 
 No discussion of the currency question in this country 
 will be complete or well understood, unless it be considered 
 with reference to our subtreasury system, which exercises 
 a most important influence upon our affairs. The charter 
 of the second United States Bank expired in 1836, following 
 the memorable controversy with President Jackson. Pub- 
 lic sentiment in opposition to the bank was roused almost 
 to the point of virulence and so continued for several years. 
 This bank, during its existence, was the most important 
 supporter as well as regulator of commerce. With it 
 eliminated, the country was largely dependent upon state 
 banks for its circulating medium, specie performing a 
 minor part of the currency functions of the time. State 
 banks were extended both as to credit and as to currency 
 far beyond the danger point and failed utterly to command 
 public confidence. Another United States Bank was de- 
 manded. Harrison, committed to the establishment of 
 such a bank, was elected President with a friendly Congress. 
 Death soon followed his inauguration, and Tyler, who 
 succeeded him, vetoed two successive measures providing 
 for such a bank, upon hair-splitting constitutional grounds. 
 This was a period of enormous expansion of credit as 
 well as of note issues by the state banks, and general dis- 
 trust of their condition drove Congress, in 1846, to the 
 establishment of the subtreasury system. Its establish- 
 ment at that time and under those circumstances, two 
 bank measures having failed, was undoubtedly justified, 
 
 43 
 
44 THE CURRENCY PROBLEM 
 
 but its retention ai the present time is inexplicable. The 
 depositing of public money in banks, or the disposition of 
 them in any manner other than in payment of treasury 
 drafts or transfer orders, was prohibited. After January 
 1, 1847, revenues were all to be paid in specie or treasury 
 notes, and the officers of the government were required to 
 hold them safely. Because very little revenue was re- 
 ceived at Washington, where the Treasury is situated, sub- 
 treasuries were located in the important cities of the coun- 
 try, for the purpose of facilitating the collection and for the 
 safe-keeping of the revenue, and hence the existence of 
 what is popularly known as the subtreasury system. It 
 was and is a safety deposit system. Whenever the govern- 
 ment's receipts exceed its payments, it draws into the 
 Treasury and locks up money that should be left in 
 circulation at the service of commerce. This tends to 
 produce a stringency in the money market, to raise the 
 rates of interest, and to reduce the value of property. 
 
 Suppose that the various states, counties, cities, towns, 
 and villages, as their taxes or revenues were received, should 
 lock them up, only to be paid out in meeting their expen- 
 ditures — under such conditions, how much currency 
 would it require to transact the business of the country "^ 
 This is not a banking system, it is the system of the 
 safety-deposit vault, or the stocking of the ignorant or 
 suspicious citizen, who needs must have within his own 
 grasp the actual money, who has no faith in credit, and who 
 refuses to contribute anything to maintaining the affairs 
 of a business world, carried on and enlarged by instru- 
 ments of credit. As early as 1853-1854, the accumulation 
 of funds in the Treasury produced such distress in the 
 country that Secretary Guthrie, in order to relieve the 
 situation, purchased government bonds at a very great 
 premium, thereby restoring money to the channels of trade. 
 From that time untU now, successive secretaries have 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 45 
 
 largely nullified the subtreasury law by buying bonds and 
 since 1864 by depositing money, which the law of that date 
 permitted, with national banks. Such a law and such a 
 system of locking up funds makes the government a part- 
 ner in every man's business. Merchants, manufacturers, 
 financiers, must study the various conditions at home and 
 abroad to determine their business hazard, but before act- 
 ing they must consider the personal idiosyncrasies of the 
 secretary and gauge, as nearly as may be, his probable ac- 
 tion — whether he will permit money to accumulate and 
 money rates to advance, or whether he will adopt a course 
 tending to prevent these results. 
 
 Commerce should be free and untrammeled so far as 
 may be, and the business interests of the country should be 
 relieved of the "steady-by-jerks" method of overcoming 
 the money-hoarding tendencies which the subtreasury 
 system renders inevitable. 
 
 II. Private vs. Public Enterprise 
 
 Experience has shown that private enterprise, within 
 its proper sphere, is more efficacious and calculated to pro- 
 duce better results than public enterprise — that is to say, 
 than governmental adventure. 
 
 The range of ambition and the stimulus to exertion are 
 much greater in private than in public life ; one's standing 
 in the estimation of his fellows is very largely determined 
 by his measure of success in whatever vocation may com- 
 mand his efforts. Success in life, in its better sense, plus 
 success in life in a business sense, seems to attend in greater 
 degree upon private rather than public enterprise. For 
 this reason matters of fundamental importance are en- 
 trusted to private interests under government control. 
 The highways and byways and routes of trade and the 
 transmission of intelligence by mail or otherwise are 
 a governmental responsibility. Such responsibility is in 
 
46 THE CURRENCY PROBLEM 
 
 large measure delegated to municipal divisions of the state, 
 as well as to corporate enterprise. 
 
 Money, that is money of ultimate redemption, is and 
 should be issued by the government only. Such money 
 constitutes the standard of value by which all property, 
 all labor, all effort, is measured. The aim of the govern- 
 ment is to have the intrinsic value, or better, the market 
 value, equal the coin value of its money as nearly as may 
 be. Where free coinage exists, the coin value and the bul- 
 lion value naturally differ only by the cost and regula- 
 tion of coinage. This is true at the present time of gold, 
 as to which free coinage exists generally throughout the 
 world. Not so, however, with silver. The bullion value 
 of silver is about one-half the coin value. Silver coin 
 circulates on a par with gold in the United States because 
 the government guarantees such parity, the government's 
 credit thus offsetting the deficiency in value. 
 
 The power and responsibility of the government in 
 respect to currency are, in part, delegated to private enter- 
 prises, by empowering banks to issue their notes to circu- 
 late and perform the office of money. 
 
 The stock of money in the country, January 1, 1908, 
 was as follows : — 
 
 Gold (including bullion in the Treasury) — unlimited 
 legal tender, $1,604,530,493. 
 
 Silver dollars — unlimited legal tender, except where 
 otherwise expressed in the contract, $562,770,982. 
 
 United States notes, commonly called "greenbacks," 
 issued during the Civil War — legal tender for all debts, 
 public and private, except duties on imports and interest 
 on the public debt, — $346,681,016. 
 
 United States notes, issued for the purchase of silver 
 bullion (law of 1890) — legal tender at face value in pay- 
 ment of all debts, public or private, except when otherwise 
 expressly stipulated in the contract, $5,479,000. 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 47 
 
 Subsidiary, or fractional silver — legal tender up to 
 ten dollars, — $139,630,994. 
 
 Nickels and pennies — legal tender up to twenty-five 
 cents, $1,159,205.72. 
 
 National bank-notes, $690,130,895. 
 
 Circulating notes are issued by the government to na- 
 tional banks applying, upon a deposit of government bonds 
 to secure their redemption. The banks are also required 
 to maintain a redemption fund with the Treasury at Wash- 
 ington, equal to five per cent of their outstanding circu- 
 lation, which notes bear upon their back the following: 
 "This note is receivable at par in all parts of the United 
 States in payment of all taxes and excise and all other dues 
 to the United States, except duties on imports, and also 
 for all salaries and other debts and demands owing by the 
 United States to individuals, corporations, or associations 
 within the United States, except interest on the public 
 debt." 
 
 The government is bound to redeem these notes upon 
 presentation, protected in turn by bonds and a deposit 
 fund. Any national bank is obliged to receive at par the 
 note of any other national bank in payment of any obliga- 
 tion owing to it. It therefore appears that these bank-notes 
 possess legal-tender qualities, are virtually an obligation of 
 the government, and lack the essential characteristics of a 
 bank-note as the same is generally understood and gener- 
 ally in use in other countries. 
 
 The people of this country do not like metaUic currency, 
 and barring subsidiary coins, very little hard money is 
 used in current affairs. More than four-fifths of all the 
 silver dollars in existence are lodged in the Treasury of the 
 United States and are represented by silver certificates in 
 circulation, the amount being $467,731,347. These cer- 
 tificates recite on their face : "This certifies that there have 
 been deposited in the Treasury of the United States of 
 
48 THE CURRENCY PROBLEM 
 
 America — silver dollars payable to the bearer on de- 
 mand." On the back of the note are found the words: 
 "This certificate is receivable for customs, taxes and all 
 public dues, and when so received may be reissued." 
 Silver certificates are issued in denominations of $1, $2, 
 $5, and $10. 
 
 Gold certificates possess the same money function as 
 silver certificates, are issued in denominations ranging 
 from $10'to $10,000, and amount to $706,612,349. 
 
 The grand total of money in the country, January 1, 
 1908, amounts to $3,349,223,380; excluding the amount 
 in the United States Treasury, we have in actual circula- 
 tion $3,078,989,298, which equals $35.48 per capita. 
 
 During the recent silver propaganda, when the govern- 
 ment was buying silver bullion monthly in the market and 
 coining it into silver money, and later purchasing bullion 
 and issuing legal-tender notes in payment therefor, we 
 were very nearly forced upon a silver basis, because of the 
 volume of our silver currency. The policy of the govern- 
 ment in this respect finally changed, and in order to 
 afford protection in the future. Congress has limited the 
 denominations of silver certificates to $1, $2, $5, and $10, 
 thereby seeking to chain their use to everyday industry and 
 to prevent their return to the Treasury in sufiicient volume 
 to disturb the relationship between the two metals. With 
 the same end in view. Congress also forbade national banks 
 from issuing notes in smaller denominations than $5, and 
 permits only a portion of their issue to be in that denomi- 
 nation. The government does not redeem silver certifi- 
 cates in gold at the Treasury, nor does it exchange gold 
 for silver, but it does redeem silver and silver certificates 
 by receiving them for customs, taxes, and all public dues. 
 
 Every source of revenue which the government possesses 
 may be paid in silver, and should the parity with gold be 
 disturbed, the entire revenue would be received in silver. 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 49 
 
 In effect, then, the government does redeem its silver money 
 in gold and must do so under existing law, so long as the 
 parity is maintained between the two metals, and the 
 maintenance of such parity is the settled policy of the gov- 
 ernment. The law provides a gold reserve fund of 
 one hundred and fifty millions, directs the secretary to 
 maintain the same, and gives him unlimited power to issue 
 and sell government bonds for that purpose. 
 
 Joseph's coat had many colors, and yet I have never 
 heard it claimed that it was not a good coat. It screened 
 his person, thus satisfying the tenets of modesty; it pro- 
 tected him against inclement weather, and thus preserved 
 his physical well-being; even though it provoked the 
 criticism of his neighbors and their descendants down to 
 the present time. 
 
 Our currency system possesses many varying qualities, 
 if not hues, but it is good beyond peradventure. It is not 
 scientific ; it ought to be unified and rendered homogene- 
 ous. It does not represent a carefully devised system, 
 for our people as yet will not follow expert opinion in mat- 
 ters of legislation. It has many variations in debt-paying 
 power, every phase representing the result of an earnest 
 conflict between contending interests, yet it is all good; 
 for all the currency which requires redemption is certain 
 to be replaced upon demand by money of final payment. 
 Briefly, then, this is the money provided to meet the retail 
 necessities of our domestic livelihood and the broader re- 
 quirements of home and foreign commerce, as well as the 
 revenues of the nation. 
 
 Each different kind of currency possesses, in different 
 degrees or respects, a legal-tender power. " Legal tender," 
 with respect to currency, means that a debtor may legally 
 tender such currency to his creditor in payment of the debt ; 
 and the creditor is bound to accept the same, and may be 
 held to such obligation in the courts. Any form of cur- 
 
50 THE CURRENCY PROBLEM 
 
 rency that has the power of extinguishing a debt (legal- 
 tender power) ought to be money. This, unfortunately, 
 is not true as to United States currency, if we give the word 
 "money" the meaning which economists give, and which 
 is adopted by the leading commercial nations. 
 
 The fiat of the government gives the currency its legal- 
 tender power; the government's mandate compels its 
 acceptance under certain circumstances and for certain 
 purposes. Gold coin, which is legal-tender money in 
 this country, is simply merchandise in Great Britain. 
 
 As we have seen, the government itself is bound to re- 
 deem these various forms of paper currency in a manner 
 which amounts practically to a redemption in gold. 
 This makes it all the more difficult to understand why 
 Congress neglects to systematize and to unify the same. 
 
 I have entered into much detail in order to show that 
 all the currency in the United States is governmental cur- 
 rency. What is generally understood as bank-note cur- 
 rency does not exist in the United States. A bank-note 
 is issued in a form with which you are all familiar, conven- 
 ient for passage from hand to hand, and recites that the 
 
 bank issuing the same will pay the bearer $ on 
 
 demand. It is the bank's I. O. U. It is not money, and 
 any one may refuse to receive the same. It is, as it recites 
 on its face, a demand obligation, and in this respect bank- 
 notes are the same as a bank's deposits, which are also 
 demand obligations. A bank's deposits are valued against 
 by checks and drafts, which pass by indorsement, and such 
 obligations constitute ninety per cent of our domestic 
 exchange. Ninety per cent of the business of the country 
 is done with checks and drafts. When a business man 
 has no use for his money, he deposits it in his bank ; when 
 he has use for it, he withdraws the same and perhaps 
 borrows from the bank in order to supply additional 
 needs. 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 51 
 
 A bank's deposit liabilities fluctuate in amount as its 
 customers increase or reduce their balances, and such in- 
 crease or reduction of course corresponds to the varying 
 conditions of business. 
 
 An increase in a bank's deposits is regarded as evidence 
 of public confidence and increased banking power ; whereas 
 an increase in a bank's note obligations, which are pre- 
 cis,ely of the same general nature and character, is looked 
 upon by some people with misgiving, as though possessing 
 possible danger. Why danger.? — for, for every bank- 
 note issued, some good asset, presumably the promissory 
 note of a solvent customer, goes into the assets of the 
 bank, thereby offsetting its note liability. 
 
 III. Bank-notes 
 
 There are two theories in respect to bank-note issues 
 — the "currency principle" and the "banking principle." 
 The "currency principle" is illustrated by the law govern- 
 ing the Bank of England. Beyond a moderate fixed 
 amount it can issue notes only in exchange for gold coin 
 or bullion, and the theory is that a paper currency possesses 
 practically the same characteristics as actual money and 
 should be subject to the same regulations as to volume 
 and in other respects generally. 
 
 The "banking principle," which appears to me to be 
 the correct principle, is that bank-notes should represent 
 the credit of the bank, that they should be issued against 
 the assets of the bank, and that the volume thereof should 
 be regulated by the credit needs of the bank's constituency. 
 A bank located in the cotton belt, while the cotton crop 
 was being made and marketed, would be gradually ex- 
 panding its note issue, and as returns from the marketed 
 crop were received and the notes of its customers paid, its 
 own notes issued would come in for redemption. Thus the 
 maximum and the minimum amounts of a bank's note issue 
 
52 THE CURRENCY PROBLEM 
 
 would be determined by the commercial demands which it 
 serves, in the same manner as the volume of its loans and 
 deposits is determined. 
 
 The first essential of an eflScient bank-note issue is 
 safety. A bond-secured currency may lay claim to safety, 
 but is in violation of every principle of commercial bank- 
 ing. The object of allowing a bank to issue its notes is 
 not to enable it to make money, but to enable it better to 
 serve the public. If the bond security is good and ade- 
 quate, a bank must invest more money in its bond security 
 than it is permitted to issue in notes. To illustrate : A 
 national bank may buy $100,000 United States two-per-cent 
 bonds, costing $105,000, and by depositing such bonds 
 with the Treasury, it is permitted to issue $100,000 in 
 notes. It has paid out $105,000 and may issue $100,000 
 in notes. Whatever the profit of the transaction may be, 
 the bank has locked up $5000 of its own money by the 
 transaction, and has to that extent diminished its power 
 to serve the public. 
 
 The utter failure of our bond-secured currency to re- 
 spond to or to serve the needs of commerce is poignantly 
 illustrated by the events of the crisis through which we 
 are now passing. The government, though not in need 
 of funds, has just made an issue of Panama bonds, in order 
 that the banks might buy them as a basis for circulation. 
 It also offered a $100,000,000 issue of one-year certificates 
 of indebtedness, drawing interest at three per cent, printed 
 in the form and size of bank-notes, in order that they might 
 serve as currency and also as a basis of bank-note circula- 
 tion. At the same time the Treasury had over $200,000,000 
 in excess of its working balance. Was there ever a parallel 
 in governmental financiering.? Borrowing money which 
 it did not need, and paying interest which might and 
 should have been avoided, in order to create a condition 
 which would permit the creation of more bank-notes — 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 53 
 
 notes, bond secured and government guaranteed — which 
 were quite as likely to go into hoarding as into circulation 
 when issued ! 
 
 Our government, sorely pressed for funds to finance the 
 Civil War, created the national bank system with a bond- 
 secured currency, in order to make a market for its bonds. 
 It imposed a ten per cent tax on state bank circulation in 
 order to force it out of existence and at the same time to 
 force the state banks into the national system. The 
 needs of that period were well served, no doubt; but the 
 same laws continuing at the present time hold commerce 
 in a strait- jacket, to the infinite loss of all. 
 
 A study of the several financial crises since the Civil 
 "War will compel any student to condemn a bond-secured 
 currency as wholly inadequate to the needs of a commercial 
 nation. 
 
 If not secured by bonds, how shall safety be guaranteed .-* 
 An annual tax of one-fourth of one per cent levied upon the 
 outstanding circulation of the national bank system would 
 have raised a sum more than suflBcient to redeem the notes 
 of every bank that has failed, and that without recourse to 
 the bonds held as security. A careful study of the na- 
 tional system during the forty-three years of its existence 
 will leave no doubt in the minds of candid men that a 
 moderate annual tax upon circulation would produce a 
 fund ample for its protection and redemption. 
 
 Life insurance is predicated upon mortality tables 
 gleaned from vital statistics of the human race, and such 
 business is conducted with safety and in enormous volume. 
 Fire insurance is predicated upon the destruction of prop- 
 erty by fire over a period of years, and the amount of pre- 
 mium necessary to cover the risk ascertained with reason- 
 able certainty. How much easier and with how much 
 greater certainty is the mortality or longevity of banks 
 ascertained. With more than forty years of complete 
 
54 THE CURRENCY PROBLEM 
 
 statistical history of the national banking system before us, 
 we are justified in assuming that a moderate guarantee or 
 safety fund is quite sufficient to protect a credit currency 
 and to insure the redemption of any bank-notes that may 
 be in default. 
 
 The experience of other nations, as well as the ante- 
 bellum experience of many of our states, furnishes histori- 
 cal evidence that the safety-fund principle will afford pro- 
 tection and insure redemption without imposing a burden 
 upon the resources of a bank such as the purchase of bonds 
 involves. It gives to the currency safety and to the bank 
 greater power to serve the public. Such notes should be 
 a lien upon all the assets of the bank and not upon any 
 segregated portion — a first lien, if you please. 
 
 The government that holds the redemption fund should 
 redeem the notes of failed banks upon presentation, and 
 would thereby, by subrogation, become possessed of a 
 note-holder's claim or lien against the assets of the failed 
 bank. Such provisions would protect all against loss on 
 account of the notes of failed banks. The redemption 
 of the notes of going banks should be insured by a gold 
 reserve of not less than twenty-five per cent. Thus for- 
 tified and protected, we may with business certainty con- 
 clude that such a note issue would be safe as well as 
 efficient. 
 
 IV. Redemption 
 
 Its redemption should be sure and prompt and made at 
 the expense of the bank of issue. So much is due to the 
 public who are asked to make use of the bank-notes. 
 Redemption of this character is also imperative in order 
 to insure elasticity, for retirement when the demand for 
 its use slackens is an essential of elasticity. If currency 
 is to circulate throughout the country, the redemption fa- 
 cilities must follow in its wake, in order that lawful money 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 55 
 
 may be received therefor at the desire of the holder, and 
 in order that anything approximating inflation may be 
 avoided. Checks and drafts, which consummate such a 
 large percentage of our business transactions, are pos- 
 sessed of perfect elasticity. They are born at command 
 and are extinguished by use. The Stock Exchange, 
 Produce Exchange, Cotton Exchange, all the exchanges 
 dealing in commodities, as well as all the varied interests 
 of any considerable magnitude in the city of New York, 
 have a currency of their own — the certified check. 
 Actual money, or currency in any form, is practically 
 unknown in the city of New York in any transaction except 
 of a retail character. The bank check performs the func- 
 tion of payment, and if the amount reaches into the 
 thousands, the check is certified. It is a perfect currency, 
 it is elastic, responding in volume to any demand; it is 
 predicated upon the credit of the parties to the transaction. 
 Its redemption is speedy and it is unvexed by arbitrary 
 laws. It is not subject to governmental interference. It is 
 absolutely responsive to the demands of trade, and without 
 it the commerce of that great city would be impossible. 
 Checks and drafts cannot, however, serve the retail cur- 
 rency demands of a community, nor are they available for 
 shipment to other localities in order to settle the balance 
 of trade. In order, therefore, to conserve the interests of 
 the public, banks should be permitted, within certain limi- 
 tations with respect to capital, to issue circulating notes. 
 Such notes should be protected by a lien upon the general 
 assets of the bank, should be further protected by a lawful 
 money reserve of not less than twenty-five per cent, and 
 should, finally, be protected by a redemption fund in the 
 hands of the government, accumulated and kept good by 
 means of an annual tax levied for that purpose. They 
 should be redeemable over a bank's counter, at the United 
 States Treasury, and at convenient points throughout the 
 
56 THE CURRENCY PROBLEM 
 
 country, thereby maintaining the notes at par throughout 
 the country. They should be subject to a moderate tax, 
 as the higher the tax the higher the rate of interest 
 charged the public. Such a currency would serve the 
 retail demands of the immediate constituency of each 
 bank. Its volume would respond automatically to com- 
 mercial demands. The small banks of the country 
 would first feel the need and be the first to issue notes, 
 in response to crop-making and crop-moving demands. 
 When their limit of issue was reached, they would, as 
 they do now under existing conditions, call upon the reserve 
 cities for funds. This would enable the reserve cities to 
 make use of their note issue, by shipment to the rural dis- 
 tricts. Their limit reached, the reserve cities would in 
 turn call upon the central reserve cities, and in such a 
 condition. New York, for instance, could issue and ship its 
 circulating notes to the interior. Under no other condi- 
 tions could they be made use of by the city of New York, 
 except in supplying the local currency demands in our 
 everyday transactions. This would enable the money cen- 
 ters to retain their reserve money, at the same time supply- 
 ing the crop-moving and other commercial demands of the 
 interior. It would make the rural portion of our country 
 less dependent upon the cities; it would relieve the cities 
 of the congestion of money in the duller portion of the year 
 and also relieve them from the severe demands that char- 
 acterize the periods of greatest business activity. It would 
 tend to stability and uniformity in the rates of interest. 
 It would give to business affairs a greater degree of cer- 
 tainty, T^hich is a cardinal need in all commercial trans- 
 actions. 
 
 It would be well, also, to permit the issue of an addi- 
 tional amount of currency, subject to a very high tax, 
 that might be availed of in just such a crisis as the one 
 through which we are at present passing. 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 57 
 
 Such a credit currency system could be well and success- 
 fully applied to our existing banking system, and in this 
 connection I commend the plan devised by a commission 
 created by the American Bankers' Association and in- 
 dorsed by that association at their annual convention held 
 at Atlantic City last fall. 
 
 While I believe that such a currency can be successfully 
 applied to the sixty-five hundred banks now in existence, 
 yet judged from an historical and scientific standpoint, 
 the currency system of a country can best be admin- 
 istered through the instrumentality of a central bank of 
 issue. England proved this and created a central bank 
 of issue and provided that the note-issuing privilege then 
 possessed by existing banks should revert to this central 
 bank of issue whenever for any cause the various banks 
 should surrender or forfeit the same. United Germany 
 taught us the same lesson, closely following the example of 
 England, but greatly improving upon the English system 
 in respect to elasticity and ability to serve commercial 
 interests. Yet in this country the manifest advantages of 
 a central bank of issue are brushed aside on the assump- 
 tion that public sentiment will not tolerate it. Public 
 sentiment changes with great rapidity and has undergone, 
 and is undergoing, pronounced change in the matter of 
 centralization of power and centralization of the control 
 of corporations in the national government. Why should 
 not those who essay to champion the interests of the people 
 as opposed to the banks favor a central bank with a 
 board of direction, a majority of whom are appointed by 
 the government, very much as in the case of the Reichs- 
 bank in Germany ? Such a bank, like other business en- 
 terprises, should earn a reasonable increment upon the 
 capital invested, but at the same time the altruistic in- 
 fluences, personated by the government, would largely 
 control. All dividends in excess of a fixed rate should go 
 
58 THE CURRENCY PROBLEM 
 
 into the United States Treasury, in order to exercise a re- 
 straining influence in its business management. The note- 
 issuing privilege and the rate-making power would be exer- 
 cised, not in the interest of one locality, but of all. The 
 Bank of England rate, the Bank of France rate, and the 
 Bank of Germany rate exercise a controlling influence in 
 those countries by force of example and force of compe- 
 tition. The Bank of France has branches throughout 
 France, and the same rate of discount obtains at all 
 branches on the same day. 
 
 By example, as well as money power, similar institutions 
 could be made to exercise a most wholesome influence in 
 bringing about a more uniform rate of interest throughout 
 our country. A central bank could render even greater 
 service in preventing the wide and wild fluctuations in the 
 rate of interest which, under our present system, have such 
 a disturbing influence upon business affairs. A disturb- 
 ance in money rates seems to characterize crop-moving 
 periods. It is natural, perhaps, that a higher rate of 
 interest should accompany periods of business activity, 
 in accordance with the law of supply and demand; but 
 fluctuations at the rapid rate which obtains in this country 
 are properly chargeable to our defective currency system. 
 Were an adequate note-issuing power given to such a 
 central bank, interest rates could be kept reasonably uni- 
 form in this country, precisely as they are in other great 
 commercial nations of the world. With a pronounced trend 
 in favor of centralization, with the popular and growing 
 demand that all corporations, national in their scope and 
 character, be regulated by the national government, is it 
 not logical and fair to assume that public sentiment will 
 presently demand that the government's receipts and dis- 
 bursements shall be made through a central bank, thereby 
 keeping funds in the channels of commerce and avoiding 
 the embarrassment and injury which result from the ab- 
 
GOVERNMENT CURRENCY VS. BANK CURRENCY 59 
 
 sorption of funds and their subsequent deposit in a lump 
 sum in the banks, which is the practical working of our 
 subtreasury system; and will not an intelligent public 
 sentiment demand that our currency — the life-blood of 
 all industry —be regulated and controlled through the 
 instrumentality of a government-controlled central bank 
 of issue? The very people who inveigh against banks 
 as a whole should demand this in furtherance of the pur- 
 poses they now have at heart. 
 
 Why will not a government-controlled central bank of 
 issue, where the banks of the country in good credit can, 
 within proper limitations, discount their receivables, re- 
 ceiving the proceeds thereof in bank-notes, afford the best 
 solution of the currency question ? 
 
GOLD MOVEMENTS AND THE FOREIGN 
 EXCHANGES 
 
 BY 
 
 ALBERT STRAUSS 
 
GOLD MOVEMENTS AND THE FOREIGN 
 EXCHANGES 
 
 Foreign exchange is the medium by means of which we 
 pay our foreign creditors and collect from our foreign 
 debtors: when the supply of exchange fails, we pay our 
 debts by exporting gold ; when the demand for exchange 
 fails, we collect our debts by importing gold. So long as 
 both supply of and demand for exchange exist, we settle 
 our accounts through the foreign exchange market which, 
 like all markets, fluctuates with the relative eagerness of 
 sellers and buyers. We speak loosely of New York owing 
 money to London; of Berlin owing to Paris. What we 
 mean, of course, is that on balance. New York individuals 
 owe to London individuals. But we are the slaves of our 
 phrases; what begins by being metaphor ends by domi- 
 nating our thinking, and so we are apt to picture London 
 as one huge creditor, malignantly collecting the last penny 
 from unfortunate New York; and we often reason about 
 these matters as though the pictures that our words call 
 up were real. Platitude though it be, I repeat that inter- 
 national commercial and financial relations are the rela- 
 tions of individuals to individuals; it is individual that 
 settles with individual . There is no solid block of indebted- 
 ness that London as an entity can call for payment from 
 New York as an entity, or of which, if inclined to be gra- 
 cious, it can extend the payment. The transactions are 
 the transactions of individuals, and are determined by 
 the judgment of each individual as to what is to his indi- 
 vidual advantage; if American stocks seem cheap to 
 London individuals, and they have or can borrow the 
 means of paying, they cannot be prevented from buying 
 
 63 
 
64 THE CURRENCY PROBLEM 
 
 them, just as Americans cannot be prevented from buying 
 French motor cars if they have the money to pay for them. 
 So when foreign individuals commit what the Stock Ex- 
 change regards as the offense of selling securities in this 
 market, remember that the American individuals that buy 
 the shares are equally guilty. A seller without the corre- 
 sponding buyer cannot close a transaction, and the balance 
 of trade is unaffected by the desire of foreign individuals 
 to sell, unless there be a corresponding desire of native 
 individuals to buy —supported by ability to pay. The 
 daily settlement of all these individual transactions makes 
 the exchange market, and in the mechanism of that market 
 we have an instrument powerful and economical, auto- 
 matically making the most delicate adjustments, actuated 
 by that most constant and reliable of all motive powers 
 — self-interest. 
 
 By foreign exchange, we mean bills of exchange drawn 
 on foreign countries, each bill being payable in the cur- 
 rency of the country on which it is drawn. The buyer 
 of such a bill here, pays the equivalent of its value in United 
 States money; the cost per unit of the foreign money is 
 called the rate of exchange. Such bills are payable on 
 demand (demand bills) or at a fixed number of days after 
 sight or after date (long bills), although sometimes money 
 is paid on cabled orders, known as cable transfers. In this 
 market, bankers are the traders ; they stand ready to buy 
 at prices varying from minute to minute all bills offered for 
 sale, and at a slightly higher rate they stand ready to 
 satisfy the requirements of buyers by selling their own bills. 
 Bankers compete closely with each other both in buying 
 the bills offered and in selling their own bills to supply the 
 requirements of buyers, and thus is created a market in 
 which there is but little margin of profit. The bills 
 offered for sale may be the bills of merchants with money 
 to their credit abroad, or of brokers that have bought 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 65 
 
 securities for foreign customers and are drawing on 
 them to reimburse themselves for the cost, etc. By far 
 the greatest volume of exchange, however, is that created 
 by the bills of grain and cotton exporters. The demand 
 for bills comes from importers that must pay for sugar, 
 coffee, silks, etc., purchased abroad; from corporations 
 that must remit for interest or dividends payable to foreign 
 holders; from American travelers, and the like. The 
 market created by these conflicting requirements fluctuates 
 within limits fixed on the one hand by the cost of exporting 
 gold, and on the other by the cost of importing it. That 
 is to say, the rates for demand bills fluctuate between these 
 limits; long bills involve other elements as well; for the 
 present, however, we will confine ourselves to the con- 
 sideration of demand bills. 
 
 When there is a heavy demand for exchange and little 
 supply, the price of exchange gradually advances. The 
 banker, called on by his customers to draw exchange for 
 them, finding few bills in the market that he can remit 
 to cover his drafts, sends gold and directs its equivalent 
 in foreign coin to be placed to his credit, and against 
 this credit he draws. There may be no market abroad 
 for our crops or manufactures; but gold need not be 
 sold in order to produce money; it need only be 
 coined. As this process can be carried on indefinitely, 
 the cost of sending gold is obviously the limit beyond 
 which the price of demand bills cannot advance. Let 
 us follow this transaction in detail. The pure gold 
 contained in one English sovereign is exactly equal to the 
 pure gold contained in $4.8665 of our gold coins ; so that, 
 apart from charges and expenses, $4.8665 of our gold will, 
 when sent abroad, produce a credit of £1 ; to this cost must 
 be added freight, insurance, and other expenses, amounting 
 to about one-fourth of one per cent. This brings the cost 
 of £1 through shipment of gold to about $4.88, which is, 
 
66 THE CURRENCY PROBLEM 
 
 roughly, the gold export point for full weight coin. The 
 exporting banker obtains his gold either by drawing gold 
 coin from his bank or else by drawing suitable currency 
 from his bank, and obtaining gold coin for it at the sub- 
 treasury. In either case, he obtains coin that has suffered 
 more or less abrasion by handling, and this loss of weight 
 by abrasion, amounting to perhaps one-tenth of one per 
 cent, increases the cost of his remittance. Generally, 
 however, the banker can obtain gold bars from the United 
 States Assay Office at the nominal charge of one twenty- 
 fifth of one per cent, although at times a larger charge is 
 made. The banker prefers bars, because on these there 
 is no loss by abrasion ; the government can afford to give 
 bars, because their export prevents the export of coin, and 
 so saves the cost of coining new money to replace that 
 shipped. 
 
 Now for gold import. When there is a large volume of 
 bills offered to bankers, perhaps by grain and cotton ex- 
 porters, and but little demand from buyers of exchange, 
 the market gradually declines in price, while New York 
 bankers, sending abroad the bills they buy, with little occa- 
 sion to draw against them, accumulate large sums to their 
 credit in London, with no way of getting the money back 
 to New York through operations in the exchange market. 
 They are not, however, helpless ; they can order gold sov- 
 ereigns sent here, and, once here, can have them melted 
 down at the United States Assay Office and coined into 
 eagles and double eagles, which they can deposit with their 
 banks. Obviously, the amount received in dollars for 
 each melted sovereign will mark the price the banker 
 can afford to pay for sterling bills, and competition among 
 bankers will prevent the rate of exchange from declining 
 below this point by more than a fair margin of profit. 
 The British sovereign, if full weight, will, when sent here 
 and melted down, yield gold for which the United States 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 67 
 
 Assay Office will pay $4.8665; the expense of sending 
 the sovereign, freight, insurance, cartage, and kegs, will 
 amount to about one-quarter of one per cent, so that the 
 net yield of the full weight sovereign in dollars will be 
 $4.85|. But between the day on which the banker buys 
 the bill of exchange in New York and the day on which 
 he receives in New York the gold which the bill entitled 
 him to collect in London, there must elapse the time 
 needed to send the bill to London, plus the time needed to 
 send the gold back (roughly fifteen days), during which 
 period the banker loses the use of the money. This loss 
 of interest must be deducted from the net yield of the im- 
 ported sovereign, and thus, if money is worth six per cent 
 per annum, the net yield of full weight sovereigns is 
 brought down to about $4,841, which is the gold import 
 point for demand exchange, when money is worth six per 
 cent per annum. Losses by abrasion will bring down 
 this point by perhaps one-tenth of one per cent to about 
 $4.83f . When money is higher, the import point will be 
 lower, and vice versa. There is therefore a margin of 
 profit in buying demand bills and importing gold sover- 
 eigns against the purchase, whenever the rate for demand 
 bills falls below the gold import point. Active ex- 
 change bankers take advantage of this profit whenever 
 exchange prices decline to the proper point, and their com- 
 petition in buying bills to cover their gold importations 
 stops further decline in exchange rates. It is interesting 
 to note that during the recent crisis, when gold and cur- 
 rency were at a premium, bankers could sell the imported 
 gold at a premium, and this constituted an additional and 
 very large profit ; gold importers could therefore pay higher 
 prices than ordinarily for exchange bought to cover the 
 importations, and the stress of competition so drove up 
 the rate of exchange that gold was being imported at a 
 profit, though exchange rates stood at what, under 
 
68 THE CURRENCY PROBLEM 
 
 ordinary circumstances, would have been the gold export 
 point. 
 
 Gold is, however, not always imported from England 
 in the form of sovereigns. The Bank of England has in 
 its vaults large quantities of American eagles and double 
 eagles exported to England in the past and held without 
 melting. The Bank also holds foreign coin and bar gold. 
 Any holder of Bank of England notes can get sovereigns 
 on demand — other gold he can get only as the result of 
 a special bargain. When gold is wanted for export, the 
 Bank is often glad to sell bar gold or double eagles at rates 
 somewhat more advantageous to the exporter than would be 
 the export of sovereigns ; this the Bank can afford to do, 
 for the expense of coining sovereigns to replace those 
 exported is thus saved, while the exporter, if he can get 
 bar gold on the same basis as sovereigns, avoids the losses 
 of abrasion. Eagles are even more advantageous to the 
 exporter, for they are bought in England by weight and 
 used in America by count; the banker therefore gets an 
 advantage if they are light, so long as that lightness is not 
 so great as to make them uncurrent — - practically he buys 
 them as light and uses them as full weight. The quota- 
 tions for bar gold and double eagles, as they appear in the 
 newspapers, may seem confusing, owing to the fact that 
 double eagles are quoted in shillings per ounce gross weight, 
 900 fine (the American coinage standard), while bars are 
 quoted per ounce of gross weight, 916f fine (the English 
 coinage standard) ; the quotation for double eagles, there- 
 fore, always seems lower. When gold bars from South Afri- 
 can mines and elsewhere arrive in London, the owners de- 
 posit them with the Bank of England, receiving sovereigns 
 at the rate fixed by law, unless a higher price is bid therefor 
 in the market for the purpose of export to other quarters. 
 The price of gold in the market cannot, of course, rise above 
 the cost of obtaining gold by withdrawing sovereigns. 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 69 
 
 The mechanism of gold import to, and export from, 
 Germany is practically the same as with England, the 
 Reichsbank being required to give gold coin in exchange 
 for its circdlating notes. At times, however, German 
 exchange has fallen below the theoretical gold import point, 
 owing, not to the refusal of the Reichsbank to give gold, 
 but to the practical obstacles that at times are somehow 
 placed in the way of free export of gold. The Reichsbank 
 does not refuse gold for its bank-notes, but German bank- 
 ers say to their correspondents : "Don't ask us to get gold 
 for you, or we shall lose caste," and on such occasions Ger- 
 man exchange rates drop to a point that is theoretically 
 impossible. I do not mean to criticize them : German 
 banks, when they refuse to demand gold of the Reichsbank, 
 do no more than our own banks and bankers did recently, 
 when asked by foreign correspondents to collect in gold the 
 raaturing obligations of railroads and other corporations. 
 As will be remembered, clearing-house funds rather than 
 cash were at that time current here, and New York banks 
 and bankers sent to their foreign correspondents the 
 same answer as the Germans have at times sent us. I 
 cite the German instance in partial mitigation of censure 
 of our own course, rather than as a reproach to them. 
 
 The Bank of France is not compelled to give gold in 
 exchange for its circulating notes ; it may at its option give 
 silver. Thus, when it is inconvenient to give gold, the 
 bank can refuse, or, if it prefers, it can exact a premium. 
 This power has been very moderately and very wisely 
 used by the bank to modify foreign demands on the one 
 hand, and, on the other, to keep interest rates low for the 
 requirements of internal trade. Of course, when a pre- 
 mium is exacted, the French gold import point drops 
 accordingly. 
 
 Between the gold export point and the gold import 
 point, exchange fluctuates under the sway of conflicting 
 
70 THE CURRENCY PROBLEM 
 
 currents and tendencies — I had almost said emotions, 
 for these currents and tendencies have their rise in emo- 
 tions, needs, and passions as varied as hfe itself, whether 
 they be hunger as expressed in the grain bill, or love of 
 elegance in the importation of silk, or forethought in the 
 profitable investment of capital. 
 
 This brief review will have made clear what is meant by 
 a free gold market — a market in which current money 
 can at all times be exchanged for gold without delay and 
 without premium. Such a market has great commercial 
 advantages ; its stability draws business to it. London is 
 such a market, and its commercial and financial preemi- 
 nence is in great measure due to that fact. Paris is not 
 such a market and does not pretend to be; Berlin pre- 
 tends to be, but cannot always be counted on ; New York 
 was believed to be before our recent panic. 
 
 I have spoken of the exchange market as an economical 
 mechanism, automatically making delicate international 
 adjustments. In justification of that observation, let me 
 direct attention to the manner in which gold, in moving 
 from financial center to financial center, always travels 
 by the most direct route, and that, too, not because some 
 public official is charged with the duty of preventing 
 waste, but because a private trader is trying to make a 
 profit, and is incidentally serving the community; serving 
 it perhaps better than if he had consciously determined 
 to serve it. 
 
 Useful acts springing from self-interest have one very 
 comforting aspect — we need have no misgivings as to their 
 continuance. Charity may grow weary or disgusted, but 
 self-interest, once enlisted, may be counted on to continue 
 in operation, whether it be the business man's self-interest 
 in a profit or the professional man's self-interest in ad- 
 vancement and fame. Of course, both the business man 
 and the professional man, in addition to seeking the direct 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 71 
 
 rewards of their labor, take an interest in their work as 
 work and make it yield them pleasure. 
 
 It is therefore satisfactory to know that, so long as the 
 banker looks after his profits, gold will move by the most 
 direct route. Let us suppose the United States to be ex- 
 porting a large quantity of cotton to England at a time 
 when little merchandise is being imported here from Eng- 
 land, but when much is being imported from France. If 
 the volume of exports to England and of imports from 
 France were large enough, we might conceivably be im- 
 porting gold from England in payment of our produce, 
 and exporting it to France in payment for her luxuries; 
 but, in practice, gold does not move that way. Every 
 morning, the New York exchange banker learns by cable 
 the Paris market rate for demand bills on London. When, 
 therefore, he finds a large volume of bills on London 
 offered for sale, and little demand for such bills, while there 
 is large demand for bills on Paris and little supply, he 
 determines, instead of drawing from New York against 
 his purchases of London bills, to let his Paris agent draw 
 against these purchases, placing the proceeds to his credit 
 in Paris; against this credit in Paris, the New York 
 banker draws his bill in francs, having thus supplied via 
 London the New York demand for bills on Paris. He 
 knows how many dollars each pound sterling costs him in 
 New York, and the Paris rate for bills on London tells him 
 how many francs each pound sterling will net him in Paris, 
 and so he can calculate how many cents each franc will 
 cost him. Moreover, he is not the only banker in New 
 York that receives cable quotations; and so with a large 
 volume of London bills offered and little direct demand for 
 such bills, and large demand for Paris bills with little 
 direct supply, we get a situation where New York bankers, 
 competing with each other to buy the London bills for use 
 via Paris, prevent the price of sterling from falling to the 
 
72 THE CURRENCY PROBLEM 
 
 gold import point ; and then, as a result, these same bank- 
 ers, competing with each other to supply the demand for 
 Paris bills, by their competition prevent the Paris rate from 
 rising to gold export point. Lastly, they compete with 
 each other in Paris, where all are sellers of bills on London 
 against their New York purchases of London bills, and 
 by that competition they reduce the rate for London bills 
 in Paris to the point, at which, other things being equal, 
 gold will go from London to Paris. What has happened, 
 therefore, is that instead of our importing gold from Lon- 
 don, and then exporting it to Paris, it has gone direct from 
 London to Paris. Why.? Not because some one has 
 deliberately set himself to benefit the community, but sim- 
 ply as the result of the blind working of economic forces, 
 under the actuating impulse of individuals seeking their 
 own profit. This tendency to work out advantageous 
 economic results under the pressure of selfish impulses, 
 appears again and again in all phases of business ; it can- 
 not be too strongly brought to view, because of the practi- 
 cal conclusion to which it points. The community will 
 benefit most if commerce and its instruments be free 
 from arbitrary interference by government. Violations of 
 economic, as of natural laws, in time wreak their own 
 vengeance. 
 
 Transactions such as those described above, where a 
 bill on one market is bought in a second market, and sent 
 into a third market, are called exchange arbitrage, and they 
 are of infinite variety. Bills are drawn on Paris against 
 German exchange ; bills are drawn on Scandinavia against 
 remittances to London ; the proceeds of bills on Switzer- 
 land or Italy are sent to Paris or to London, etc. ; and 
 many of these combinations are daily calculated by numer- 
 ous active bankers all over the world, who take advantage 
 of every one sixty-fourth of one per cent of margin. 
 Thus are the markets kept from drifting apart. It may 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 73 
 
 be asked who benefits by this competition. The answer 
 is that the merchant benefits, the importer as a result buy- 
 ing his exchange more advantageously, and the grain and 
 cotton exporter selling his bills at a better price. 
 
 So much for checks or demand exchange. Cable 
 transfers require but a word. They differ from demand 
 exchange in that the proceeds are paid out at once at 
 destination, instead of awaiting transit of a bill by steamer 
 — hence the seller of cable transfers loses interest during 
 the time of transit at the rate of interest current in the 
 market to which the transfer is made, and his rate for 
 selling cable transfers is accordingly higher by so much. 
 In abnormal times, however, the difference may be much 
 greater; during last November, for instance, when Lon- 
 don banks were unwilling to advance money to facilitate 
 the shipment of gold, the possession of funds in London 
 was an advantage, the value of which was measured by the 
 profit on gold shipments, and this profit, owing to our cur- 
 rency premium, was great enough to make cable transfers 
 unusually valuable. 
 
 Hitherto we have considered only the exchange of the 
 money of one currency into that of another, and the 
 mechanism by which this is effected; with long bills we 
 enter the domain of international credit. Credit is a 
 strange thing, dehcate, sensitive, and yet hardy, — hardy 
 enough to do the heaviest work under sympathetic condi- 
 tions, and yet so deUcate and sensitive that the slightest 
 false note will cause it to shrink and withdraw ; and when it 
 withdraws, neither coaxing nor force (least of all force) 
 can draw it back until conditions are again suitable to 
 its temperament. When credit ceases to work for us, 
 the burden is thrown upon coin, a slow, lumbering sub- 
 stitute. It is as though the main engine of a huge factory 
 had broken down, and the workmen were attempting to do 
 with hand tools what the machines had before been doing. 
 
74 THE CURRENCY PROBLEM 
 
 Before discussing long bills drawn by bankers here on 
 their correspondents abroad, which bills are the principal 
 medium whereby money rates between markets are equal- 
 ized, let us consider commercial long bills. A merchant 
 here buys goods in India or China ; the seller desires to be 
 paid when he ships the goods ; the buyer cannot afford to 
 pay for the goods before he receives them, perhaps not 
 until he has had time to deliver them to his customers 
 here. What happens ? It may be asked, why not let the 
 China merchant draw on the New York merchant, and 
 attach to the drafts the bills of lading and insurance 
 policies representing title to the goods shipped. There are 
 several reasons. 
 
 In the first place, banks in China prefer bills on London ; 
 not only are they mostly English banks, which do not 
 keep well informed on New York rates of exchange, but 
 in addition the pound sterling has always been the current 
 international money. You might as well defy a law of 
 nature as a trade custom; such customs cannot be rea- 
 soned with. As Walter Bagehot well puts it: "In every 
 market a dealer must conduct his business according to the 
 customs of the market, or he will not be able to conduct it 
 at all." Again, the China merchant's bank may not want 
 to incur the risk of buying the bill of exchange, even with 
 shipping documents attached, for fear that the New York 
 merchant should on some pretext refuse payment, in which 
 case the China bank, instead of cash to its credit, would 
 have a shipment of merchandise on its hands in New York. 
 Further, the China merchant himself may not know the 
 New York merchant well enough to ship goods and to take 
 the chance of their being refused. Lastly, as the draft 
 would generally reach New York before the shipment, the 
 New York merchant would have to pay for the goods be- 
 fore he actually had them in hand. To overcome these 
 obstacles, it has been for years a custom, in cases where 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 75 
 
 the New York mercliant trusts the China merchant, for 
 the former to get from his New York bankers, who must 
 be a firm of world-wide reputation, a letter addressed to 
 their London agent directing the London banker to accept 
 the sixty-day or ninety-day or four-months bill of exchange 
 of the China merchant, when such bill of exchange is 
 accompanied by bills of lading, insurance policy, consular 
 invoice, etc., in respect of a shipment of merchandise, the 
 nature of which is specified in the letter. This is called a 
 letter of credit, and this letter of credit the New York 
 merchant sends to the China merchant with his order for 
 goods. When the shipment is ready, the China merchant 
 draws his bill on London at ninety days' sight, let us say, 
 and takes it, together with the letter of credit and the 
 shipping documents, to his own bank in China. This 
 bank, on the authority of the New York banker's letter of 
 credit, buys the bill on London at the current rate for 
 such bills. The China bank sends the bill to its London 
 agent, who presents it to the London agent of the New 
 York banker for acceptance; upon acceptance the ship- 
 ping papers go to the accepting banker, who thereupon 
 sends them to the New York banker. Neither the New 
 York banker nor his London agent has so far paid any 
 cash ; they have simply lent their credit. When the goods 
 arrive in New York, the New York banker permits the 
 New York merchant to take possession of them and to 
 deliver them to his customers, from whom he receives pay- 
 ment for them. The New York merchant must pay his 
 New York banker in ample time to permit the latter to 
 remit to his London agent before the bill of exchange falls 
 due in London. 
 
 Let us now turn back and follow the fate of the bill 
 of exchange after it has been accepted and handed 
 back to the London agent of the China bank. It is now 
 a bill having ninety days to run, drawn by the China 
 
76 THE CURRENCY PROBLEM 
 
 merchant, accepted by the London agent of the New 
 York banker, and indorsed by the China bank as well 
 as by its London agent — a very substantial commercial 
 instrument. In this form, it is offered for discount to 
 one of the great English discount houses, which pays 
 over to the London agent of the China bank the pro- 
 ceeds, less interest to maturity at the current rate. In 
 anticipation of the discounting of this bill in London, the 
 China bank has drawn a demand bill on its London agent, 
 and so has reimbursed itself for the money paid to the 
 China merchant in buying his bill. The whole transaction 
 has thus been handled by means of credit through the 
 creation of a commercial instrument of high character, 
 in which the London discount house was glad to invest its 
 deposits; these deposits themselves being but credits in 
 another form — but that is another story. 
 
 So much for the part played by long bills in our import of 
 commodities. Now for a typical case touching exports. 
 Let us take cotton. For some reason, perhaps because 
 buyer and seller are separated by only a week's trip, and so 
 know each other better, letters of credit are not custom- 
 ary in connection with our exports of cotton. When we 
 export cotton, the China case is practically repeated; a 
 credit is opened, only no letter of credit is actually issued. 
 The English buyer arranges with his banker to accept the 
 drafts of the American cotton dealer and notifies the Ameri- 
 can dealer to draw his sixty-day bill on the London 
 bank, with shipping documents attached. The American 
 cotton dealer borrows from his local bank to buy cotton 
 from the farmer, whom he pays in cash; when he has 
 gathered enough cotton for a shipment, he ships on, through 
 bills of lading, from his Southern home direct to Liverpool ; 
 these bills of lading he attaches to his sixty-day draft on 
 London, and the London draft with its documents he 
 attaches to a draft on his New York agent. With this 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 77 
 
 New York draft he repays the local bank. The New 
 York agent, in turn, sells this sixty-day bill on London to 
 a New York banker, and with the proceeds meets the cotton 
 dealer's draft on him. On the other hand, the exchange 
 banker sends the sixty-day bill to London for discount, 
 and against the proceeds draws a demand bill on London. 
 It is the China case over again. 
 
 The London discount houses, bill brokers, and others 
 dealing in acceptances and other commercial instruments 
 can, under regulations and within limitations prescribed 
 by that Bank, at any time rediscount at the Bank of Eng- 
 land, at its posted rate, the commercial instruments they 
 hold. German banks can do the same at the Reichsbank, 
 and French banks at the Banque de France. When the 
 volume of such rediscounts increases beyond the limit 
 deemed advisable by the bank, the bank raises its discount 
 rate, with the immediate effect not only of checking re- 
 discounts, which thus involve losses, but with the further 
 effect of making unprofitable the drawing of foreign 
 bankers' long bills, these bills being drawn for the purpose 
 of lending the proceeds in some dearer money market, as 
 explained hereafter. The raising of the bank rate, by its 
 tendency to check the drawing of foreign long bills, reduces 
 the credit balances of foreign bankers, and so tends either 
 to attract gold to London, or else to decrease the chance of 
 its export; but, while thus tending to protect the Bank's 
 gold, it has the incidental effect of penalizing domestic 
 business by its high rates, and as a consequence it is usually 
 resorted to with reluctance. 
 
 In London, Paris, and Berlin, and, in fact, at all the 
 foreign centers, the quick assets of banks are to a great 
 extent invested in acceptances having three months or less 
 to run. The volume of capital so invested is enormous ; 
 these acceptances are constantly maturing, and the pro- 
 ceeds are constantly being reinvested. Being always in 
 
78 THE CURRENCY PROBLEM 
 
 a state of flux, this capital is ready at a moment's notice to 
 depart for the most remunerative market. These banks 
 regard foreign acceptances as very desirable investments, 
 and are eager to take them when their rates are more 
 remunerative than home rates. For should home rates 
 advance, the possession of maturing foreign bills enables 
 any bank to extend additional assistance to its customers, 
 without calling on other home industries to contract their 
 lines of credit; furthermore, the possession of such bills 
 enables gold to be drawn from abroad, if needed. 
 
 When a bank rate is so raised, it has the further effect of 
 increasing the rate of interest charged on securities carried 
 in that market, and this tends to make brokers and deal- 
 ers pay their indebtedness in the dearer market, and to 
 transfer their loans to a cheaper market. It has the ten- 
 dency of making all international debtors pay their indebt- 
 edness in that market and borrow in cheaper markets. 
 These tendencies all combine to lower rates in the market 
 affected, and to raise them in cheaper money markets. 
 The vast mass of fluid credits at the disposal of the Lon- 
 don and Paris markets give these markets their supremacy. 
 American capital has been and is so fully employed in the 
 development of native resources that it is not generally 
 available for investment abroad, and so New York cannot 
 hope for many years to occupy the central position in the 
 financial world. Important New York certainly is, and 
 its importance is growing; the large exports of American 
 grain and cotton give it the capacity at times to dominate 
 other markets by drawing gold, and this makes it at such 
 times a formidable factor ; but, until it has acquired a vast 
 fund of fluid capital ready to seek temporary investment 
 in the best-paying market, it will not be a financial arbiter 
 among nations. 
 
 The most elusive part of the subject remains to be dis- 
 cussed, viz., bankers' long bills. They constitute, as be- 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 79 
 
 tween the United States and Europe, the principal medium 
 of equalizing money rates, and, as pointed out by Mr. Paul 
 M. Warburg in his very able pamphlet,' they are far too 
 limited in their scope to do justice to our requirements. 
 When English discount rates rise, French bankers buy 
 English acceptances, thereby employing their funds more 
 profitably than at home ; their buying tends to lower Lon- 
 don rates, and their abstention from the Paris market to 
 raise rates there. Berlin bankers do the same, both in 
 London and in Paris. The bankers of the European 
 money centers are constantly scanning the possibilities of 
 one another's money markets. But they cannot operate 
 thus directly in the New York market, because we have 
 not created a commercial instrument responsive to their 
 demand. Where we in the United States allow debts 
 between merchants to stand as open accounts, debtor 
 merchants abroad furnish their creditors with bank 
 acceptances, and these the creditor discounts through 
 his bank. Our failure to provide such a commercial 
 tool makes it impossible for foreign banks to invest here 
 in bills bearing the number of responsible commercial 
 and banking names to which they are accustomed, and so 
 our ability to attract for temporary use the funds of other 
 markets is limited to the long bills of such of our banks and 
 bankers as do a foreign exchange business. 
 
 If the rate of discount in London is three per cent, and if 
 a New York banker can draw a sixty-day bill on his Lon- 
 don agent and sell it in New York at a price based on the 
 London discount, the drawer's profit or loss in the transac- 
 tion will depend on two factors : first, on the rate of interest 
 at which he can employ the proceeds in New York, and, 
 secondly, on the rate of exchange that he will have to 
 pay for demand bills sixty days hence, for then he must 
 meet his maturing long bill in London. If money here 
 
 ' Defects and Needs of our Banking System, by Paul M. Warburg, 1907. 
 
80 THE CURRENCY PROBLEM 
 
 can be invested for those sixty days at four per cent per 
 annum, he will have a margin of interest at the rate of one 
 per cent per annum for sixty days, or one-sixth of one per 
 cent, out of which to pay his London commissions, to meet 
 any loss of exchange, and to find his profit. If, when his 
 sixty-day bill matures, demand bills on London are again 
 selling at the same rate as when he drew the bill, his profit 
 will be one-sixth of one per cent less his London com- 
 missions. If the exchange rate is then lower, he will 
 make an additional profit; if higher, he may make no 
 profit — he may even face a loss. If the general level of 
 exchange is high when he draws his bill, he will be more 
 likely to make a profit on exchange, and will therefore be 
 content with a smaller interest profit, while, with exchange 
 very high, he may be content with no interest profit at all, 
 relying on the exchange profit alone. So, too, the season 
 of the year when his long bill matures will influence him ; 
 other things being equal, exchange is likely to be lower in 
 the autumn, when our exports reach their maximum, 
 and higher at the end of the year, when interest remittances 
 are to be made. In reliance on, or rather in anticipation 
 of, these seasonal fluctuations, bankers are apt in July 
 and August to draw long bills, so that these may mature 
 about the time when cotton and grain bills come into the 
 market, hoping to cover at a profit by purchasing the 
 export bills. 
 
 The requirements of bankers, seeking to cover these 
 summer-drawn bills, provide a good market for exporters' 
 bills. During last summer, however, London houses, 
 mistrusting the state of American credit, discriminated 
 against American bankers' bills, and as a result com- 
 paratively few were outstanding last autumn. This cir- 
 cumstance led to a situation containing perhaps certain 
 elements of retribution. The exchange market had ad- 
 justed itself to these new conditions before autumn. At 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 81 
 
 that time grain and cotton bills began to come forward in 
 great quantity, for Europe's harvests had been scant, and 
 our produce was needed there. With little demand from 
 bankers to meet maturing long bills, the importation of a 
 large amount of gold was inevitable, and this import move- 
 ment gained added impetus from the very considerable 
 purchases of our securities by Europeans at panic prices. 
 In other words, by discriminating against American bills 
 during the summer, the London financial houses had put 
 out of action the automatic governor that tends to hold 
 things even, with the result that in the autumn they were 
 entirely defenseless against our large demands for gold. 
 
 But to return to bankers' long bills. Such bills when 
 sold here are bought by other bankers who happen to need 
 remittances, for, when these bills have been discounted 
 in London, they are cash and answer the same purpose as 
 demand bills. Involving, as they do, however, a slight 
 risk for sixty days, they sell an infinitesimal fraction lower 
 than a precise calculation of the discount would warrant, 
 and are to that extent a more economical remittance. Bank- 
 ers buy such bills to cover the demand drafts they have 
 sold to their customers. The same banker may therefore 
 be buying long bills to cover his own demand bills, and 
 at the same time be selling long bills in order to lend out the 
 proceeds. It was by means of long bills that, in 1895, 
 gold exports from New York, when they had reached a 
 menacing point, were checked by a syndicate headed by 
 J. P. Morgan and Company. This syndicate comprised 
 all the leading drawers of foreign exchange, and the pur- 
 pose of its formation was to create a sufficient volume 
 of exchange by drawing of long bills (whether at a profit 
 or at a loss) to prevent further exports of gold. It was 
 successful in accomplishing this purpose. 
 
 Bearing in mind, then, that the general level of exchange 
 rates will in part determine the decision of the banker in 
 
82 THE CURRENCY PROBLEM 
 
 drawing long bills, we are prepared to understand the 
 automatic operation by which economy of gold movement 
 is secured, through postponing exports or imports until 
 conditions make them imperatively necessary. 
 
 Should exchange rates rise very high and approach the 
 export point at a time when money rates here are higher 
 than they are abroad, we should have at work two causes 
 tending to create additional bills of exchange, and so, by 
 keeping down exchange rates, to postpone the export of 
 gold. These causes are the high money rate and the high 
 exchange rate, both, as explained, strong inducements 
 for drawing long bills. When interest rates in the 
 two markets are about equal, the interest motive is in- 
 operative, and only the exchange motive for drawing long 
 bills exists ; the effect of that alone, though of less force, 
 would again be to retard exports. 
 
 With gold imports, we see corresponding forces at work. 
 To make gold import probable, exchange must be low; 
 under those circumstances there is little inducement to 
 draw long bills, unless money rates here are very high 
 indeed. To the extent that they are drawn, however, they 
 facilitate imports by forcing down exchange, and so hasten 
 the journey of gold to the dearer money market ; but this 
 occurs only when the money market is in great need. On 
 the other hand, when, with low exchange rates, money 
 rates are also low, bankers will hold commercial long bills 
 without discounting them abroad, and without drawing 
 against the proceeds, not only because the higher foreign 
 interest rate, on the basis of which the bills are bought, is 
 more remunerative, but also because there is the chance of 
 selling the exchange at higher rates later. When exchange 
 is so held without discounting or drawing against it, it is 
 virtually taken out of the market, thus raising exchange 
 rates and deferring imports. 
 
 So once more we see the trader's eager quest for a profit. 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 83 
 
 regulating, automatically, financial adjustments that pa- 
 ternal oversight by government might bungle, but could, 
 in no event, improve. 
 
 Some of the great foreign banks, notably the Bank of 
 France, seek at times to stimulate the import of gold into 
 their market by lending to private banks, without interest, 
 the cash needed for the operation. Leslie M. Shaw, when 
 Secretary of the Treasury, made similar loans to national 
 banks here, returnable on receipt of the imported gold 
 from abroad. Secretary Shaw did this at a time when 
 exchange had fallen to a point at which importations 
 would have been possible, had interest rates been at six 
 per cent; interest, however, was much higher than six 
 per cent, and so no gold was being imported. Interest 
 may be regarded as the friction of commercial machinery, 
 and in the case in question the friction was so great that the 
 gold-importing machinery needed unusual power to start it. 
 The secretary overcame the friction. This action of 
 Secretary Shaw has been much discussed, and different 
 views in regard to it are entertained. Certainly greater 
 justification for such action existed than often exists when 
 the Bank of France takes similar action. The sufferers 
 from failure to import gold promptly had been our ex- 
 porters, who, by reason of the unusually low level of ex- 
 change rates, had been receiving low rates for the export 
 bills they had for sale, though they probably succeeded in 
 shifting a part of this load to the shoulders of foreign 
 buyers. In connection with this action of the secretary, 
 two questions provoke discussion : first, whether or not the 
 gold imported in this frictionless manner would have come 
 to us in any event. Critics of the secretary believe that 
 exchange would have continued to drop, and that in the 
 end the gold would have come. The advocates of auto- 
 matic adjustment must, however, recognize that, like all 
 markets, the exchange market is ever in motion ; at every 
 
84 THE CURRENCY PROBLEM 
 
 point it is subject to a multitude of tendencies of ever 
 varying force. If it advances a point, new supplies may 
 be attracted and a part of the existing demand may be 
 withdrawn ; if it declines, the reverse may take place : 
 at every moment new elements of supply and demand enter, 
 and if gold is not imported to-day, to-morrow the occa- 
 sion and the need of it may have passed. On the other 
 hand, if it is once known that the gold import point 
 has been permanently raised, these forces will inevitably 
 assume new relations to the market. When these new 
 relations are once definitely established, we shall probably 
 import no larger amounts of gold than we would have done 
 under the old conditions. The gold imported under Sec- 
 retary Shaw's offer might not have come to us without his 
 aid; but, if his aid was really instrumental in drawing 
 it here, it was because, the offer being unexpected, the 
 market had not suflficient time to adjust itself to the new 
 conditions, and being of uncertain duration, it was im- 
 possible to operate for the future in reliance upon their 
 continuance. 
 
 Secondly, having thus imported, by the frictionless 
 method, gold that we will assume we would not otherwise 
 have secured, does it follow that we shall for that reason 
 reexport it ? By no means. The exchange market, 
 when it draws away from the gold import point, does not 
 shoot up to the export point; it runs the gauntlet of a 
 thousand tendencies that buffet it up and down, and it 
 may not reach the export point for many months. It is 
 like the valves that we see on water tanks : when the water 
 falls below a certain level, the pump is started automati- 
 cally, and when the water rises to another level, the pump is 
 automatically cut out. Between its cutting in and cutting 
 out, the water may be drawn quite low and then again be 
 raised by rain or otherwise, and then drawn down again; 
 but no matter how near the water may get to either limit. 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 85 
 
 provided it does not reach that limit, many causes may 
 interfere to postpone its setting the pump in motion. 
 
 I can see no objection, practical or theoretical, to the fric- 
 tionless movement of gold. Whatever feeling it evoked 
 abroad would vanish, if it were understood, once for all, 
 that this would be our usual custom. By establishing 
 this custom, we should somewhat narrow the extreme 
 range of exchange fluctuations; but this in itself would 
 be an advantage. The purpose could be easily accom- 
 plished by permitting banks to count as part of their re- 
 serve gold actually in transit : it is immaterial whether that 
 gold be in the banks' vaults or only on its way there. 
 Rarely will any bank be so hard pressed that it cannot 
 spare a portion of its reserve for a week or two, knowing 
 that it will be received at the end of that time, and, more- 
 over, a bank so situated that it could not spare the cash 
 from its reserves would not attempt to import gold. The 
 one real risk would be loss in transit, and that risk being 
 protected by insurance, the only risk would be of delay. 
 
 This automatic import and export of gold furnish to the 
 currency of every country a very considerable element of 
 automatic elasticity. France and Germany have other 
 elements of elasticity arising from the note issues of their 
 government banks ; but gold movement is the only element 
 of elasticity in the currency of Great Britain, Bank of Eng- 
 land notes being merely certificates of deposit for sov- 
 ereigns held on storage, except the fixed amount of 
 £18,450,000, uncovered notes. 
 
 Our currency is, therefore, more elastic than that of 
 Great Britain, for we have the elasticity imparted by our 
 national bank-notes — a sluggish, inert elasticity — the 
 elasticity of an old rubber band; such bands, like our 
 national bank-note circulation, will expand a certain lim- 
 ited distance, but neither the old rubber bands nor our 
 bank-note circulation will contract. Of course, with a vast 
 
86 THE CUERENCY PROBLEM 
 
 country and huge crops raised in remote sections, our cur- 
 rency requirements are entirely different from those of 
 Great Britain. Beyond question our currency machinery 
 should be remodeled and improved; but recognition of 
 the need of change has, to many, come so recently and so 
 suddenly that we are, at the present time, in greater dan- 
 ger from hasty and unmatured action than we have hitherto 
 been from failure to act. We need action, enlightened 
 action ; but, in order to secure it, we need, first, a thorough 
 understanding of the requirements. That topic in its 
 details is beyond the province of this paper ; but a word on 
 the subject is proper here, because consideration of the 
 nature of those requirements follows logically on the dis- 
 cussion of elasticity as imparted by gold movements. 
 We need elasticity, in addition to that imparted by the 
 import and export of gold, in order that the periodical, 
 temporary, hand-to-hand currency requirements of crop- 
 moving and holiday seasons may be met without disturb- 
 ing credit lines; but this elasticity must be so planned 
 that it cannot be used, except perhaps in times of great 
 emergency, for the purpose of erecting a larger credit 
 structure upon our cash reserves. It is my opinion that 
 these requirements can best be met by a central bank 
 properly organized and administered, and I believe that 
 a form of organization can be devised for such a bank 
 that will effectually protect it from the danger of political 
 control or influence. 
 
 High interest rates, like high temperatures in the human 
 body, are symptoms of disease, and when they show them- 
 selves, we must seek to cure the disease, not doctor the 
 symptoms. Except when caused by need of currency for 
 hand-to-hand purposes, high interest rates indicate an 
 overextension of credit that calls for contraction and liqui- 
 dation, and in former days they brought about that con- 
 traction and liquidation. During the last few years, how- 
 
GOLD MOVEMENTS AND FOREIGN EXCHANGES 87 
 
 ever, high interest rates have failed to do this, because the 
 business community has come to rely more and more upon 
 Washington intervention to keep interest rates down. 
 Accordingly, in the belief that such rates would prevail 
 for but a short period, business men have been willing to 
 pay rates that a few years ago would have brought about 
 prompt liquidation, and with it, relief. Under our present 
 awkward currency arrangements, it is perfectly proper 
 that the Treasury Department should in slack seasons 
 gather in surplus currency, in order to place it again in 
 circulation at crop-moving seasons, and that it should at 
 other times redeposit surplus revenues with banks, so as 
 not to cause unnatural contraction. But this necessary 
 Treasury action has accustomed us to look to Washington 
 for relief from high money rates, however caused, with the 
 result that high rates have for the last few years lost their 
 terrors, and have failed to bring about needed liquidation. 
 In remodeling our currency, we must devise a system 
 which provides for the currency requirements of crop- 
 moving seasons without liquidation of credit lines, and 
 which keeps Treasury money in the channels of trade, thus 
 taking away the power of the Treasury over interest rates. 
 When that shall have been brought about, interest rates 
 will once more have become a valuable indication of 
 credit conditions, and the business community will again 
 heed their timely warnings. 
 
THE NEW YORK CLEARING HOUSE 
 
 BY 
 
 WILLIAM A. NASH 
 
THE NEW YORK CLEARING HOUSE 
 
 WoBDS OF Introduction, as Presiding Officer 
 
 I APPRECIATE very highly the honor of presiding over 
 this meeting, as it gives me an opportunity to make some 
 personal references to the Clearing House of this city and 
 a few brief comments upon some phases of the present 
 state of affairs. 
 
 I feel I can speak more freely to this audience, as 
 through the suggestions of your former President Low, 
 the bank with which I am connected, and in which a 
 large number of the students of Columbia are deposi- 
 tors, opened its University Branch very near here. If 
 through that agency I have in any way assisted in the 
 work of education by impressing upon those young men 
 the value of accuracy and the wisdom of a strong cash 
 reserve as leading principles of commercial morality, I 
 hope I shall not have been unworthy of being named 
 among your most useful professors and educators. 
 
 It is very easy to understand the keen public interest 
 in all that relates to clearing houses and especially the 
 great one in New York City. Money and credit are two 
 great interests that come home to our business and 
 bosoms, and the men who handle them, in distinction 
 from those who talk about them, are the subjects of 
 natural curiosity. 
 
 As an organization of power and influence in financial 
 matters, I know of none that excels or equals the New York 
 Clearing House. It has its usual daily duty of making 
 the practical exchanges between the banks, by which 
 
 91 
 
92 THE CURRENCY PROBLEM 
 
 your check arrives for payment in an incredibly and 
 sometimes uncomfortably short space of time, and it has 
 its occasional function as the conservator of business 
 interests and the potent agency by which panics are stayed 
 and the baleful effects of public excitement are arrested 
 and regulated. Nine times in its history the Clearing 
 House has come to the rescue of the business community 
 and the public at large by the issue of loan certificates, 
 a remedy now so well understood that its aid is eagerly 
 clamored for at these times of emergency. These loan 
 certificates constitute the only experiment in asset and 
 emergency currency that this country has ever had. In 
 the half century of its existence this method of help has, 
 as I have said, been used nine times, and without the 
 loss of a single dollar. I have no doubt that the present 
 issue will have the same happy solution. I had the honor 
 recently to say in public that the pointings of the loan 
 certificates now in existence all over the country wher- 
 ever there are clearing houses were unerringly to a great 
 central bank. 
 
 Without enlarging on this idea at this time, I want to 
 emphasize one phase of such a central bank that is abso- 
 lutely necessary for its success. I refer to the character 
 of its management. I contend that only the men who 
 are experts in banking should dominate and control such 
 an institution. I draw the idea from my experience with 
 the men who have so brilliantly served the public in the 
 New York Clearing House, and with whose grand and 
 unselfish work I have been familiar all my business life. 
 
 The Clearing House Committee is composed of five 
 bank officers and the president of the Association. The 
 best bankers of New York have been selected for mem- 
 bership on this committee. 
 
 The Clearing House Committee man to be successful 
 must be a practical banker, of broad and enlightened 
 
THE NEW YORK CLEARING HOUSE 93 
 
 sympathies, of courage and unselfishness, and with 
 promptness and decision to meet unexpected and unusual 
 conditions. These conditions arise no more suddenly and 
 in no more perplexing forms than in financial matters 
 in a time of panic and disturbance. The emergency is 
 very often dramatic and intense, and I do not wonder 
 at the curiosity and interest that centers around the 
 Committee in exigencies similar to that through which we 
 have just passed. I have been filled with admiration 
 at the foresight, the discretion, and the boldness of these 
 giants of finance, in the several crises where their decisions 
 and judgments have had far-reaching results. The public 
 confidence in this Committee has never been impaired. 
 I should like to point to some of the men who are honored 
 and cherished for their services in the Clearing House. 
 I recall the magnetic George S. Coe, one of the most 
 resourceful of thinkers; Jacob D. Vermilye, for many 
 years the Nestor of our banking fraternity; George G. 
 Williams, of the Chemical Bank; Edward N. Perkins, of 
 the Importers & Traders' Bank; Henry W. Cannon, of 
 the Chase, and later his successor in that oflSce, A. Barton 
 Hepburn; J. Edward Simmons, of the Fourth National 
 Bank; Dumont Clarke, of the American Exchange; James 
 T. Woodward, of the Hanover; and Alexander Gilbert, of 
 the Market and Fulton, now president of the Association. 
 I might enlarge the list very greatly, but the thoughts of 
 every banker turn to one man, who during a long term of 
 years rendered the most brilliant and useful services to 
 the banking world and who centered in himself all the 
 admirable traits imaginable in a master of finance. I 
 refer to the late Frederick D. Tappen, whose name has 
 been on our lips many times during the past months. 
 Genial, magnetic, courageous, bold, courteous, and dis- 
 cerning, he was for years the controlling power in financial 
 circles. He was not the president of a large bank, nor a 
 
94 THE CURRENCY PROBLEM 
 
 man of great wealth, but held his control of affairs by the 
 force of his individuality, his personal character, and 
 experience as a banker. The prominence and power of 
 Mr. Tappen illustrates the leading principle of Clearing 
 House control. It is not held by large banks but by large 
 men. Often the president of a small bank has been the 
 most influential in our councils, and the character and 
 force of the man have always counted more than the size 
 of his bank. 
 
 When the present financial crisis broke upon us, it was 
 instantly felt that the growth of our banking interests 
 demanded a larger force for the management than on 
 previous occasions, and the Loan Committee, which was 
 the Clearing House Committee, was authorized to associate 
 five other bank officers to assist them. It gave a fine 
 opportunity of initiating the younger bank officers into 
 the working force of the Clearing House, and the result 
 of the experiment has been to add to our available men — • 
 always too small — these rising men in our profession. 
 The Chairman of that Associated Committee is the speaker 
 of the afternoon. He is not only practically conversant 
 with Clearing House work, but his book on clearing houses 
 is a standard work on the subject. The Clearing House 
 Committee is under great obligations to the committee 
 over which he has presided so ably. I have the pleasure 
 of presenting to you Mr. James G. Cannon, Vice-President 
 of the Fourth National Bank of New York. 
 
CLEARING HOUSES AND THE CURRENCY 
 
 BY 
 
 JAMES G. CANNON 
 
CLEARING HOUSES AND THE CURRENCY 
 
 The Supreme Court of one of our states has defined 
 a Clearing House as " an ingenious device to simplify and 
 facilitate the work of the banks in reaching an adjustment 
 and payment of the daily balances due to and from each 
 other at one time and in one place on each day." In 
 practical operation, it is a place where all the representa- 
 tives of the banks in a given city meet, and under the 
 supervision of a competent committee or officer, selected 
 by the associated banks, settle their accounts with each 
 other, and make or receive payment of balances, and so 
 "clear" the transactions of the day for which the settle- 
 ment is made. 
 
 But we must go farther than this, for though originally 
 designed as a labor-saving device, the Clearing House has 
 expanded far beyond those limits, until it has become a 
 medium for united action among the banks in ways that 
 did not exist even in the imagination of those who were 
 instrumental in its inception. A Clearing House, there- 
 fore, may be defined as a device to simplify and facilitate 
 the daily exchanges of items and settlements of balances 
 among the banks, and a medium for united action upon 
 all questions affecting their mutual welfare. 
 
 The clearing houses in the United States may be 
 divided into two classes, the sole function of the first of 
 which consists in clearing notes, drafts, checks, bills of 
 exchange, and whatever else may be agreed upon; and 
 the second of which, in addition to exercising the functions 
 of the class just mentioned, prescribes rules and regulations 
 for the control of its members in various matters, such as 
 
 H 97 
 
98 THE CURRENCY PROBLEM 
 
 fixing uniform rates of exchange, interest charges, collec- 
 tions, etc. 
 
 Clearing houses may also be divided into two classes 
 with reference to the funds used in settlement of balances : 
 first, those clearing houses which make their settle- 
 ment of balances entirely on a cash basis, or, as stated in 
 the decision of the Supreme Court above referred to, 
 "by such form of acknowledgment or certificate as the 
 associated banks may agree to use in their dealings with 
 each other as the equivalent or representative of cash"; 
 and second, those clearing houses that make their set- 
 tlements by checks or drafts on large financial centers. 
 
 The primary object of a Clearing House is, as stated, 
 the exchange of checks and drafts between the banks 
 associated together for that purpose, and the settlement of 
 balances resulting from such exchanges ; but this is not 
 the only function exercised. As already shown, this 
 single function constitutes a Clearing House of the first 
 class, while the addition of other functions puts the 
 organization into another class. The tendency has been 
 marked, especially in recent years, to include within the 
 legitimate field of clearing houses all questions affecting 
 the mutual welfare of the banks and the community as a 
 whole. The bankers west of the Mississippi have given 
 to the country the most striking examples of the pos- 
 sibilities of clearing houses exercising various special 
 functions, while the great associations of the East, and 
 especially that of New York, have exemplified the utility 
 and value of Clearing House loan certificates. 
 
 The most important of the special functions of a Clear- 
 ing House are : (a) the extending of loans to the govern- 
 ment, (b) mutual assistance of the members, (c) fixing 
 uniform rates of interest on deposits, (d) fixing uniform 
 rates of exchange and of charges on collections, (e) the 
 issue of Clearing House loan certificates. 
 
CLEARING HOUSES AND THE CURRENCY 99 
 
 Less than a decade after the inauguration of the 
 Clearing House system in America, the Civil War broke 
 out and threw the government into a condition of acute 
 financial embarrassment. The ordinary sources of income 
 were insufficient to meet the demands of the approaching 
 crisis. Thereupon the banks, members of the clearing 
 houses in New York and Boston, responded with prac- 
 tical unanimity to the call of the government for loans, 
 by which the latter was enabled to put armies in the 
 field and to maintain the struggle for national unity. 
 
 In times of panic, it is not infrequently the case that a 
 bank in good standing becomes temporarily embarrassed. 
 Unfortunate report may cause a run upon it, and, being 
 unable to call in a sufficient amount of its outstanding 
 loans to meet the demands of its frightened depositors, 
 it must either secure a loan or fail. In such an emer- 
 gency, the other members of the Clearing House are usually 
 willing to render assistance until the strain is relaxed. 
 To secure such aid, however, a bank must be sound in its 
 management and of good repute in every respect ; other- 
 wise, the members of the Clearing House are likely to 
 decline assistance, being quite willing to get rid of a weak 
 and ill-managed member. 
 
 Another of the special functions of a Clearing House is 
 the fixing of uniform rates of interest on deposits. In 
 some associations the legality of such action is still re- 
 garded as a moot question, and hence they are reluctant 
 to enforce such a rule. Other associations have not 
 hesitated, however, to regulate their members on this 
 point. As early as 1881, the rates of interest were agreed 
 upon in Buffalo, and were observed practically without 
 fraction or violation, for some nine years thereafter. 
 They were broken at last only because of their non- 
 observance by new banks, which at the outset refused to 
 become members of the Clearing House organization. 
 
100 THE CURRENCY PROBLEM 
 
 Still another of the special functions which I have 
 mentioned is the fixing of uniform rates of exchange and 
 of charges on the collection of items. In 1881, also in 
 Buffalo, a prominent banker in that city succeeded in 
 uniting the banks on rates. The promoter of the enter- 
 prise, though well known for rate-cutting, was a successful 
 banker, and had always been able to meet competition 
 successfully. Hence, when he proposed a uniform rate 
 system, the other banks were only too glad to consider 
 his propositions. The rates were not high, but were 
 arranged so as to do justice, so far as possible, to the 
 banks on the one hand and the depositors on the other, 
 and so satisfactory was the new regime that it remained 
 in harmonious operation for nearly nine years. As was 
 the case with the agreement fixing the uniform rates of 
 interest on deposits, the non-observance of the collection 
 exchange rules by the new banks made its continuance an 
 injustice to the member banks. 
 
 The matter of collecting checks and other items outside 
 of the city of New York is a subject that for many years 
 had received most careful thought on the part of the 
 officers and members of the New York Clearing House. 
 An amendment to the constitution was adopted March 13, 
 1899, directly bearing upon this point and embodying a 
 policy that was so radical as not only to attract attention 
 throughout the entire financial community, but at the 
 outset to incite more or less opposition. As time has 
 passed, however, the justness of the provisions has become 
 apparent, and the business community has acquiesced in 
 what is manifestly an entirely reasonable measure. The 
 clearing houses of Boston and Chicago have since put 
 rules of this character in force. Briefly, its important 
 provisions are as follows : after naming certain of the 
 larger cities in the East as points upon which it is optional 
 as to whether the banks make a charge for collecting 
 
CLEARING HOUSES AND THE CURRENCY 101 
 
 items, it specifies certain states, mostly east of the Missis- 
 sippi, and including Virginia and West Virginia on the 
 south, upon which a charge of not less than one-tenth 
 of one per cent must be made by the collecting bank, and 
 upon all other states in the Union, and for items upon 
 Canada, the collecting banks shall charge not less than 
 one-quarter of one per cent of the amount of the items, 
 respectively. The amendment also provides penalties for 
 the violation of its provisions, the penalty for the first 
 violation being a five-thousand-dollar fine, and in case 
 of a second violation, any collecting bank may be expelled 
 from the association. 
 
 The daily routine of the New York Clearing House is as 
 follows : each business day, at ten o'clock, the exchanges 
 take place between the banks. The two essential repre- 
 sentatives of each bank are the "delivery clerk" and 
 the "settling clerk." The former delivers the packages 
 brought, and the latter receives the return packages from 
 the messengers of the other banks. 
 
 Each member sends its items for the other banks made 
 out separately and inclosed in envelopes, with the amounts 
 listed on the "exchange slip" attached to the outside. 
 On their arrival at the Clearing House, the settUng clerks 
 furnish the proof clerk, sitting at his desk in the manager's 
 gallery, with the "first ticket," upon which is entered 
 the amount brought or "credit exchange," and which 
 the latter transcribes on the Clearing House proof under 
 the head of "Banks Cr." The total of the amounts thus 
 brought by the several clerks constitutes the right-hand 
 main column of that sheet. 
 
 The bank representatives usually gather at about a 
 quarter to ten, and a few minutes later the manager 
 appears in his gallery. At one minute before ten he sounds 
 a gong as a signal for each of the clerks to station himself 
 in his proper place. Each bank's settling clerk has his 
 
102 THE CURRENCY PROBLEM 
 
 own desk, back of which he stands, while the delivery 
 clerks form on the outside with their exchanges carried 
 in a box. The delivery clerks arrange thenaselves in 
 consecutive order, and stand ready for delivery as they 
 pass along the counter. They carry with them "de- 
 livery clerk's receipts," or little slips containing the 
 amounts for each bank arranged in order, upon which 
 the several settling clerks, or their assistants, give receipts 
 for the packages delivered. 
 
 All are now in a position for the exchange. The 
 manager calls "ready," and promptly at ten o'clock he 
 sounds the gong again and the delivery of the packages 
 begins. He looks down four columns of men, moving 
 simultaneously like a military company. At the start 
 each advances to the desk in front where his first delivery 
 is to be made. He deposits the package of items and also 
 the receipt slip, on which the assistant of the settling clerk 
 (or in the case of small banks the settling clerk himself) 
 writes his initials opposite the amount of the package 
 delivered in the blank space provided for that purpose. 
 At the same time, in an opening in the desk, which serves 
 for that purpose, he deposits a small ticket containing the 
 amount of the package. If correct, it must agree with 
 the amount listed on the "exchange slip." This process 
 is repeated at the desk of each of the banks, each delivery 
 clerk making the complete circuit in ten minutes to the 
 point from which he started. 
 
 Being now at liberty, each delivery clerk takes back to 
 his bank the exchanges deposited by the other messengers, 
 while the settling clerks remain until the proof is made. 
 
 The settling clerks, immediately upon the completion of 
 the exchange of packages, sum up, as quickly as possible, 
 the amounts entered on their statements under the head 
 of "Banks Dr." Upon ascertaining the total, they make 
 out another ticket containing the credit and debit ex- 
 
CLEARING HOUSES AND THE CURRENCY 103 
 
 changes and the balance, and send the same to the 
 "proof clerk," who transcribes the debit exchange under 
 the head of "Banks Dr." (the credit exchange having 
 already been entered) and the balance on the credit 
 side or debit side, as the case may be. 
 
 While this is being done, the settling clerks are check- 
 ing back from the small tickets, to ascertain whether the 
 amounts agree with the amounts listed on their state- 
 ments from the exchange slips. By this time the proof 
 clerk has footed the four columns on his sheet, viz., the 
 credit and debit exchanges and the credit and debit 
 balances. If the former two agree with the latter two, 
 the work is correct, and the result is announced by the 
 manager, who then calls off credits and debits. 
 
 Thus far no money has entered into the transaction. 
 Checks, notes, drafts, and other items have passed through 
 the exchanges, but as yet no occasion has arisen for the 
 use of a single penny. Evidently, however, the clearing 
 is not yet complete. Each member has in its possession 
 paper drawn upon itself which the other members have 
 credited on their books, and likewise each member has 
 given in exchange to each of the other members paper 
 drawn upon them respectively and which it has credited 
 upon its own books. But the possibility is very remote 
 that the amounts of the items delivered by any member 
 to the other banks will exactly balance the sum total 
 received from them. Indeed, so slight is the chance 
 of such an agreement, that in the whole history of the 
 Association there has not been a single instance of this 
 kind, although the approach on one occasion was within 
 one cent of an exact exchange. Hence, each day after the 
 exchange, the general proof will show a debit on the part 
 of some banks and a corresponding credit on the part of 
 others. To complete the clearings, therefore, it is neces- 
 sary for the banks to settle these balances. 
 
104 THE CURRENCY PROBLEM 
 
 Accordingly, before half-past one o'clock, each debtor 
 bank, in compliance with the requirement of the con- 
 stitution, pays into the Clearing House the amount of 
 its debtor balance, and obtains a receipt for the same, 
 signed by the assistant manager. After half-past one, 
 the creditor banks receive at the Clearing House their 
 respective balances, and give their receipt for the same 
 in a book provided for that purpose ; but in no case can 
 a creditor bank receive its balance until all the debtor 
 banks have paid in. 
 
 With the exception of fractional amounts, balances are 
 settled with legal-tender notes, gold coin, United States 
 and Clearing House gold certificates, and during panic 
 times with Clearing House loan certificates. 
 
 By resolution and amendment, covering nearly the 
 whole period of its history, the New York Clearing House 
 Association has been developing the present system for 
 regulating the conduct of those outside, or non-member 
 institutions, which enjoy the privileges of the Clearing 
 House. No other Association in the United States even 
 approximates that of New York in the rigorous conditions 
 it imposes upon non -member banks, and in the consequent 
 safeguards it has thrown around its members. This 
 subject of members clearing for outside institutions is 
 one that is just now receiving a great deal of attention 
 from the Clearing House authorities. A member bank, 
 being responsible to the Association for the clearances 
 of a non-member bank for at least twenty-four hours after 
 notice of ceasing to clear has been given, it has always 
 been customary for the clearing bank to take securities 
 from the non-member institution for which it clears, to 
 provide against the contingency of loss; but on account 
 of complications arising from the failure of one or two 
 state institutions, where large blocks of the most desirable 
 assets were found to be in the possession of the clearing 
 
CLEARING HOUSES AND THE CURRENCY 105 
 
 bank, to cover their clearances, a law was passed by the 
 Legislature, called the Saxe Bill, which states in brief 
 that the effect of the statute is to forbid the enforcement 
 of any lien against the moneys or securities so deposited 
 for any clearances made after notice or knowledge that 
 the banking superintendent has taken possession of a 
 non-member institution. Hereafter, therefore, the former 
 validity of a lien of this character is absolutely annulled, 
 so far as respects the assets of a state bank or individual 
 banker. It appears, however, that where such clearing 
 is made for a trust company non-member, this statute 
 will not apply, since the words used are merely state bank 
 or individual banker, and since section 2 of the banking 
 law does not include a trust company in its definition 
 of the terms "bank" or "individual banker." 
 
 This makes it extremely dangerous for bank members of 
 the Association to clear for non-member banks, organized 
 under the laws of the state of New York, and this statute 
 might some day be construed by the courts to apply also 
 to the trust companies. This is one of the things that 
 has helped the agitation for the admission of the trust 
 companies to the privileges of the Clearing House, and at 
 a meeting of the Association, held on January 13, 1908, 
 a resolution was adopted authorizing the admission of 
 trust companies to full membership in the Clearing 
 House, provided they will keep a reserve in cash equal to 
 twenty-five per cent of their deposits. Full membership 
 carries with it, besides the privilege of clearing checks, 
 etc., direct, the right of having representatives on com- 
 mittees, a voice in the entire management of the Associa- 
 tion, and the privilege of taking out Clearing House 
 loan certificates when they are authorized. At the same 
 meeting an amendment was offered, but laid over for 
 three months, providing for a new class of members in 
 the Association, to be known as associate members. Such 
 
106 THE CURRENCY PROBLEM 
 
 members would have all tlie privileges and benefits of the 
 Clearing House, except a voice in its management, and 
 would be obliged to keep a reserve on their deposits of 
 only fifteen per cent. 
 
 Until January 16, 1908, there was nothing in the con- 
 stitution of the New York Clearing House requiring its 
 members to keep a cash reserve. The twenty-five per 
 cent reserve which is so often spoken of in connection with 
 the bank statement was kept by the banks without any 
 law of the Clearing House. At a meeting of the Asso- 
 ciation, held on January 16th, an amendment to the con- 
 stitution was adopted, requiring that thereafter all mem- 
 bers of the Association, or those who should thereafter 
 become members, should maintain in their vaults a cash 
 reserve of twenty-five per cent of their deposits. By 
 compelling all of its members to keep a twenty-five per 
 cent reserve, and by making this reserve a condition to 
 the admission to the privileges of the Clearing House, of 
 trust companies as well as banks, the general banking 
 situation in this city will be greatly strengthened. 
 
 By the admission of the trust companies to full or 
 associate membership in the Clearing House, the bank 
 statement, which is published every Saturday, will be 
 much more comprehensive than ever before, because it 
 will henceforth include nearly all the financial institutions 
 in the city. 
 
 There is much to be said on this subject of the bank 
 statement. As before stated, it is the custom in New 
 York City to publish the details of the banks' standing 
 each Saturday noon, and in many instances, because of 
 this incompleteness, I believe it is a disturbing factor. 
 Boston and Philadelphia also publish their bank state- 
 ments in detail, but Chicago has never done more than 
 give the totals to the public. Many people find fault with 
 the bank statement because it is made up of averages ; but 
 
CLEARING HOUSES AND THE CURRENCY 107 
 
 if they would only stop to consider, they would readily 
 see that that is the only way a statement could be made up 
 that would not be a disturbing factor to the financial 
 situation. If a statement was published of the condition 
 of each bank in the Clearing House as it stood at the close 
 of business on Friday afternoons, it would necessitate 
 the very heavy calling of loans on Thursday and Friday 
 preparatory to such a statement, and Saturday, being a 
 half holiday, the banks would be obliged to carry very 
 large sums of money over the week end; in fact, the 
 whole business of banking would be disarranged, and 
 money would always be easier at the beginning of the 
 week than at the end. With the present system of aver- 
 ages, if through some combination of circumstances a 
 bank swings under its required reserve in the beginning 
 of the week, it knows that by calling a few loans each day 
 it has several days in which to readjust itself, and in that 
 way secure a more or less satisfactory average for the 
 week. I, therefore, believe that a bank statement based 
 upon averages is the only one to be given to the public. 
 As a guide, however, to the Clearing House authorities, 
 but not for publication, possibly a statement showing 
 the actual condition of the banks at the close of business 
 on Friday might be of great assistance as indicating 
 whether the statement had been made up on rising or 
 falling averages. 
 
 We come finally to the subject of Clearing House loan 
 certificates, which has been receiving much attention of 
 late, and which deserves especial mention. 
 
 Clearing House loan certificates may be defined as 
 temporary loans made by the banks associated together 
 as a Clearing House Association, to the members thereof, 
 for the purpose of settling Clearing House balances. 
 
 To obtain an intelligent understanding of the real 
 character and purpose of such certificates, it will be well 
 
108 THE CURRENCY PROBLEM 
 
 to consider for a moment the circumstances under which 
 they are issued. In the course of the last hundred years, 
 the United States has undergone periodical derangements 
 of business affairs, when confidence was displaced by 
 mistrust, when the payment of debts became difficult, 
 when property values declined and business houses 
 failed, when industry and trade were paralyzed and 
 general stagnation ensued in all lines of enterprise. In 
 such times, depositors in banks, stricken with fear and 
 sometimes pressed with need, drew out their deposits, 
 in many instances to such an extent as to render it difficult 
 or even impossible for the banks to contract their loans 
 sufficiently to meet the demands thus made upon them. 
 Under our present currency system there is no method 
 of expanding the money volume as occasion demands, 
 whereby the banks can continue their usual loans and 
 discounts and thus prevent a panic, with all its evil 
 consequences. Hence it is left in a large measure to the 
 financiers of each community to work out their own 
 remedy, supplemented by such mutual assistance as a 
 courteous regard for each other may dictate, or as business 
 relations may demand. 
 
 Quick to see the deficiency in our currency system, and 
 the desirability of in some way supplying it, the bankers 
 of New York, over forty years ago, devised the scheme of 
 issuing Clearing House loan certificates as a method of 
 relief from monetary stringencies. Subsequently, nearly 
 all the clearing houses in the great centers adopted the 
 same device, and by their heroic resort to the measure, they 
 have at different times relieved the community of untold 
 disaster, for which invaluable service they have justly 
 received the grateful recognition of the entire country. 
 
 The great value of Clearing House loan certificates 
 consists in the fact that they take the place of money in 
 settlements at the Clearing House, and hence save the use 
 
CLEARING HOUSES AND THE CURRENCY 109 
 
 of so much actual cash, leaving the amount to be used by 
 the banks in making loans and discounts and in meeting 
 other obligations. The volume of currency, to all intents 
 and purposes, is expanded by this means to the full amount 
 of the certificates issued. 
 
 The loan certificates are taken out by the Clearing 
 House members through loan committees especially ap- 
 pointed, and are used, as a rule, only in the payment 
 of balances among the associated banks. Thus, when 
 the stringency in the money market seems sufficient to 
 demand it, the Clearing House Association meets and 
 appoints a committee, called the loan committee, con- 
 sisting usually of five bank officers, to act in concurrence 
 with the president of the Clearing House Association, 
 who serves as ex-officio member. It is the duty of such 
 committee to meet each morning at the Clearing House 
 and examine the collateral offered as security by the 
 banks, and to issue loan certificates thereon in such 
 denominations and proportions to collaterals deposited 
 as may be agreed upon. In the history of the past, the 
 denominations have varied from twenty-five cents to 
 twenty thousand dollars in the different associations, and 
 in proportion varying from fifty dollars to one hundred 
 dollars of certificates to one hundred dollars of collateral 
 deposited. 
 
 These loan certificates bear interest at rates varying 
 from six to nine per cent per annum, payable by the 
 banks to which they are issued to the banks receiving 
 such certificates in settlement of daily balances. Hence 
 the interest charged against certain banks must exactly 
 equal and offset that credited to certain other banks. 
 The aim is to fix the rate sufficiently high to insure the 
 retirement of the certificates as soon as the emergency 
 which called them forth has passed by. As a rule they 
 are retired by the banks which take them out as soon 
 
110 THE CURRENCY PROBLEM 
 
 as they have obtained sufficient cash to meet their daily 
 obligations. Notice is given by the debtor banks to the 
 committee calling for such certificates as they wish to 
 retire, and the committee gives notice to the banks 
 holding the same, stating that the interest will cease after 
 a specified date. In due course, the holders send the 
 certificates through the Clearing House for redemption. 
 Upon the retirement of the certificates, the collateral 
 deposited as security is surrendered by the committee 
 in the same proportion to certificates surrendered as 
 was required for deposit. 
 
 The first issue of Clearing House loan certificates was 
 made in 1860, and the last is still outstanding. These 
 certificates have been more extensively and generally 
 used in the panic of 1907 than in any previous panic, 
 and there has been developed a tendency to use them, 
 in the smaller denominations, as a circulating medium 
 throughout the country, to take the place of currency 
 that has been withdrawn from circulation ; and I believe 
 that one of the most potent factors in stopping the force 
 of the recent panic was the issue of these Clearing House 
 loan certificates by the clearing houses throughout the 
 country. 
 
 Owing to a popular misconception of the character 
 and purpose of these loan certificates, much adverse 
 criticism has been indulged in, especially in 1893, on the 
 ground that such issues were made in violation of the 
 ten per cent prohibitive tax on bank-note currency, 
 other than national-bank note circulation. Such objec- 
 tions were based on the assumption that Clearing House 
 loan certificates were a form of national bank currency 
 — an assumption which is ill founded in both theory and 
 fact. The certificates were and are essentially temporary 
 loans made by the banks banded together as a Clearing 
 House Association to the members of such Association, 
 
CLEARING HOUSES AND THE CURRENCY 111 
 
 and were available to such banks only for the purpose of 
 settling balances due from and to each other. In the 
 words of the Comptroller of the Currency, they are but 
 due bills, and their sole function consists in discharging 
 obligations at the Clearing House. In New York an 
 attempt on the part of a Clearing House bank to use 
 them otherwise would insure a fine and other penalties 
 provided in the rules governing the Association. The 
 courts have decided that they shall not be regarded as 
 money, and the imposition of a tax upon them, therefore, 
 would be a serious blow to one of the most effective and 
 ingenious contrivances for the delivery of the country from 
 the throes of panic that has yet been devised. 
 
 In reading the newspaper discussions in connection 
 with the so-called Aldrich Currency Bill, which is now 
 before Congress, I notice that it has been suggested that 
 the issuance of Clearing House loan certificates should 
 be prohibited by law. It does not seem possible that 
 any student of finance who is familiar with the uses of 
 these certificates could, for one moment, make such a 
 recommendation. Had it not been for the issuance of 
 Clearing House loan certificates by the associated banks 
 of New York during the recent crisis, we should not have 
 been able to import any considerable amount of gold 
 from Europe. Very few people realize that in importing 
 gold it is necessary to create a credit on the books of a 
 bank, upon which the gold importer may draw, through 
 the Clearing House, in payment of the cable transfers and 
 bills of exchange necessary to cover the amount of gold 
 to be brought over. Clearing House loan certificates 
 enabled the banks to make these credits, and that is the 
 reason we were able to import such a large volume of gold 
 during the past few months. The banks extended their 
 facilities to the importers, who brought over the gold on 
 "trust receipts," which were deposited with the banks 
 
112 THE CURRENCY PROBLEM 
 
 as collateral security, pending the arrival of the gold. 
 These issues of Clearing House loan certificates also 
 provided credit with which the banks were enabled to 
 buy and pay for large amounts of the Panama bonds and 
 United States certificates of indebtedness which were 
 issued by the government as a measure of rehef. The 
 bonds and certificates so purchased were then placed on 
 deposit in Washington, as security for new national- 
 bank note circulation. Under the present laws, and 
 according to the provisions of the Aldrich Bill, so called, 
 it is imperative that the banks should first buy bonds, 
 send them on to Washington, and wait for its preparation 
 before they can receive the new circulation. The credit 
 to purchase these bonds, in times of panic, must be 
 obtained in some way, as there would be no sense in 
 pajdng out reserve money to buy bonds for circulation, 
 and receive no return on the same for a week or ten days, 
 and then only in national-bank notes which cannot be 
 counted as reserve. The custom has grown up of late of 
 national banks borrowing bonds, which they have de- 
 posited with the Treasurer of the United States as 
 security for government deposits, and for the purpose of 
 releasing government bonds for circulation. I do not 
 believe that the National Bank Act ever contemplated 
 anything of the kind, and I think it is one of the outgrowths 
 of our present financial system. It was, however, abso- 
 lutely necessary to issue Clearing House loan certificates 
 to enable the banks to purchase United States bonds, and 
 thus secure additional circulation. 
 
 It was also imperative, in the panic through which we 
 have just passed, to issue Clearing House loan certifi- 
 cates to save the trust company situation. The trust 
 companies, having no Clearing House of their own, were 
 compelled by the very nature of things to ask the Clearing 
 House Association to assist them in saving the situation. 
 
CLEARING HOUSES AND THE CURRENCY 113 
 
 by the issue of Clearing House loan certificates to enable 
 them to liquidate the large deposits of the trust companies 
 of which they were taking care. The methods pursued 
 by the committee in charge of the trust companies was to 
 place certain collateral, which had been deposited with it, 
 in the hands of the trust companies which had subscribed 
 to the fund for upholding those that were in trouble. 
 Such of the companies as desired to do so made their 
 own notes, and with the collateral received from the 
 committee, borrowed from the Clearing House banks 
 with which they did business the amount necessary to 
 meet their subscription to the trust company "pool," 
 at the same time giving authority to the banks to hypothe- 
 cate their note and collateral with the New York Clearing 
 House Association, and receive Clearing House loan 
 certificates for the same. Had it not been that the 
 New York banks were able to take out Clearing House 
 loan certificates in connection with this phase of the 
 matter, a very grave situation would certainly have 
 developed. 
 
 It might be well to remember in connection with this 
 matter that the banks themselves also subscribed a very 
 large amount of money to assist the trust company " pool," 
 and if necessary, in order not to interfere with the handling 
 of their regular business and the accommodation of their 
 customers, they could at any time have taken out more 
 Clearing House loan certificates. 
 
 These illustrations will show what an important part 
 Clearing House loan certificates played in the panic, and 
 the absolute necessity for their creation and use. 
 
 Clearing House loan certificates create an elasticity in 
 the assets of banks. In times of panic what is wanted is 
 assets that are readily convertible, and that will pay de- 
 positors as well as permit new loans. In such times banks 
 need expansion in the right direction, and not contraction. 
 
114 THE CURRENCY PROBLEM 
 
 We are just now in the midst of a discussion of the 
 currency problem in this country, and one of the strange 
 things about the matter is that no two persons can exactly 
 agree on the subject. Every one has a "special plan" 
 which he thinks will solve the problem. I am one of a 
 growing number of bankers who believe that in the 
 adaptation of the Clearing House loan certificates we 
 have the solution of the problem. We do not need 
 more fixed currency in this country, but we need flexi- 
 bility to meet emergencies such as we have been passing 
 through. This class of currency should be retired imme- 
 diately, as soon as its usefulness is ended. 
 
 In times of panic or extremely tight money, banks 
 need two things : something that will enable them to 
 convert their fixed assets into liquid assets without calling 
 upon borrowers for payment, and with these new liquid 
 assets extend further credit to their customers, because 
 in such times the demands of occasional borrowers upon 
 the banks are very great. This is really the purpose of 
 Clearing House loan certificates, as they allow banks to 
 take to the Clearing House their fixed assets and convert 
 them into a medium of exchange between themselves, thus 
 allowing an extension of further credit, which credit is 
 utilized by their depositors through the Clearing House. 
 
 Add to this function one more, and you will give us 
 all that is needed to meet any emergency, viz., a currency 
 to take the place of that which is hoarded. The hoard- 
 ing of money always accompanies panics. Panic always 
 produces fright, not only among the people at large, but 
 among the banks themselves, and if at such a time we 
 could have a safe currency which would fill in the gap 
 temporarily, we should have solved the problem as far as 
 panics are concerned. 
 
 The reserve balances of the country banks are, as a 
 rule, kept in the large money centers, and upon these 
 
CLEARING HOUSES AND THE CURRENCY 115 
 
 centers they depend for their excess supply of currency. 
 I would, therefore, have in every large city where there 
 is a subtreasury the Clearing House incorporated, recog- 
 nized by law, and prepared to do business with the 
 United States government. I would have a "United 
 States Emergency Currency" printed in large quantities 
 and held under proper safeguards in each subtreasury. 
 I would permit the Treasurer of the United States, on 
 proper application, to receive Clearing House loan cer- 
 tificates of the associated banks in any of these cities as 
 collateral security, and advance fifty per cent of the 
 amount of such certificates deposited, in emergency cir- 
 culation, to such associations. Such circulation should 
 bear six per cent interest, so that it would be retired at 
 once when not needed. 
 
 This circulation would cost the banks twelve per cent, 
 as they would be obliged to pay six per cent on the full 
 face value of the Clearing House loan certificates taken 
 out. The Clearing House could make rules and regu- 
 lations for apportioning this currency among its members, 
 and I would have the "United States Emergency Cur- 
 rency" retired by the deposit of lawful money with the 
 Treasurer of the United States, just as the national-bank 
 note circulation is now retired. 
 
 You can have no better security for a circulation of 
 this character than Clearing House loan certificates, issued 
 under proper safeguards and carrying, as they do, the 
 joint guaranty against loss of all the members of the 
 Association. Of course this would mean a change in 
 our laws, and injecting into our currency another kind of 
 money; but it would be secured beyond peradventure. 
 Its retirement would be provided for promptly, and when 
 outstanding in the hands of the public would be covered 
 by ample collaterals or by lawful moneys of the United 
 States, deposited against its retirement. 
 
116 THE CURRENCY PROBLEM 
 
 Such currency must be issued by the United States 
 government to be of value, as the membership of the 
 clearing houses does not consist entirely of national banks, 
 but includes state banks and trust companies ; and to be 
 of assistance to the general situation, in times of panic, 
 these institutions must also have the benefit of an emer- 
 gency circulation, if we desire the stability of all the finan- 
 cial institutions of this country. 
 
 I would include in the act of incorporation of the 
 clearing houses a provision that Clearing House loan 
 certificates could be issued at such other times as in the 
 wisdom of the members of the Association they were 
 needed, and thus also provide a flexible currency for crop- 
 moving periods or other money stringencies. An emer- 
 gency currency of any character whatever must be quickly 
 retired and canceled, and not be permitted to remain 
 outstanding as a further inflation of our already much 
 inflated currency ; by providing for its redemption by 
 the deposit of lawful money, you throw around it an- 
 other safeguard. 
 
 A currency of this character would also meet the re- 
 quirements of the mercantile community. If a merchant 
 borrowed from his bank, say, two hundred thousand 
 dollars, on his single-name paper, the bank could give 
 him credit on its books for that amount less the discount, 
 upon which he would be at liberty to draw through the 
 Clearing House, and if it became necessary the bank 
 could borrow from the Clearing House, through the pooled 
 credits of all its members. Clearing House loan certifi- 
 cates to the amount of one hundred and fifty thousand 
 dollars (the Clearing House requiring a margin of thirty- 
 three and one-third per cent). 
 
 The merchant would then inform his bank that he 
 needs currency for pay-rolls. His bank could provide 
 for his needs in this respect by requesting the Clearing 
 
CLEARING HOUSES AND THE CURRENCY 117 
 
 House to deposit the one hundred and fifty thousand 
 dollars of certificates with the subtreasury, and receive 
 seventy-five thousand dollars in emergency circulation, 
 which in turn could be handed to the depositor. 
 
 In times of very active money and panic periods, the 
 bank and the merchant are willing to pay a high rate of 
 interest for this privilege, and as soon as the stress and 
 storm are over and money returns to its accustomed chan- 
 nels, lawful money could be deposited and the emergency 
 currency retired. The merchant's collections would be 
 made, his paper retired, and it would have served the 
 purpose for which it was created. This same method 
 could be pursued with all borrowers who needed assist- 
 ance, either merchants or banks. 
 
 , This would seem to me to provide a safe emergency 
 circulation, having behind it: first, the credit of the 
 institution and its collateral as passed upon by a com- 
 mittee of bank officers; second, the fact that a large 
 margin of collateral is required before certificates are 
 issued; third, the fact that the government is asked to 
 advance only fifty per cent on Clearing House loan certifi- 
 cates ; and fourth, the certainty of its prompt retirement 
 in lawful money of the United States. 
 
AMERICAN AND EUROPEAN BANKING METHODS 
 AND BANK LEGISLATION COMPARED 
 
 BY 
 
 PAUL M. WARBURG 
 
AMERICAN AND EUROPEAN BANKING METH- 
 ODS AND BANK LEGISLATION COMPARED 
 
 A COMPARISON of European and American banking 
 methods and legislation is so broad a subject that it cannot 
 be fully dealt with in a single address. It will, therefore, 
 be necessary to limit ourselves to the broad outlines of 
 the subject. We shall endeavor to state the general 
 basis of the banking business in Europe and to compare 
 it with our own, and where European methods differ 
 from each other in detail, we shall single out for the 
 purpose of comparison that system which is generally 
 acknowledged to be the most efficient. Furthermore, 
 in speaking of Europe, we shall understand the term to 
 mean primarily the three prominent financial powers, — 
 England, France, and Germany. 
 
 Let us begin by establishing the line on which modern 
 banking has developed. From the primitive method 
 of bartering goods for goods, exchange gradually develops 
 to the acceptance of an acknowledged standard or meas- 
 ure, be it the accepted value of an ox, a slave, a woman, 
 a measure of grain, or a certain weight of metal. Those 
 means of exchange which prove the most durable and, 
 at the same time, are the handiest because, being the most 
 precious, they absorb the least space, are finally evolved as 
 the best measures of value. Thus gold and silver of offici- 
 ally certified weight and fineness have developed as the 
 coin and currency of nations. The next evolution is that, 
 instead of accepting and carrying about clumsy masses 
 of metal coins, the owner is satisfied to accept a certificate 
 of ownership of metal — the note. Here we see the first 
 
 121 
 
122 THE CURRENCY PROBLEM 
 
 appearance of credit. Credit means, literally, faith; 
 it is faith in the bank or government issuing the paper 
 representing the bullion. We reach a state of modern 
 banking, however, only when to this credit, which still 
 means payment for each transaction in coin or coin 
 certificate, are finally added other bank credits, which 
 become part and parcel of the banking system. This 
 means that instead of paying by money only, the vast 
 majority of the payments are effected through transfer of 
 credits; it means payment by check. I need not dwell 
 at length on this question of deposits and checks, as it 
 has been fully dealt with in some of the preceding addresses. 
 The check, however, is only one of the factors, although a 
 very important one, that constitute a modern banking 
 system : many other currency-saving devices which pre- 
 vent the use and absorption of cash have to be added 
 to render the system a perfect one. We must add a 
 modern system of bills of exchange (by which we mean 
 two- or three-months paper drawn on banks or bankers 
 or indorsed by them) well regulated by clear and simple 
 laws. As the check acts as a means of transfer of cash 
 credits from one owner to another, so the transfer of the 
 acceptance of a bank is the transfer of credits on time ; 
 it is like the transfer of banks' interest-bearing certifi- 
 cates of deposit on time. We shall have to deal fully with 
 this important question a little later. As parts of a mod- 
 em banking system we must further add well-organized 
 stock and produce exchanges and clear and simple laws 
 regulating the administration of corporations, and the 
 issue, the transfer, and ownership of securities. All 
 these refinements of our business intercourse, if I may 
 so call them, have the object and effect of minimizing the 
 physical transfers of property, and of reducing to a mini- 
 mum the dangers of such transfers by establishing well 
 defined and generally accepted laws and regulations 
 
AMERICAN AND EUROPEAN BANKING 123 
 
 governing such transactions, by avoiding unnecessary 
 payments (through clearings), by liquidating whatever 
 balances remain to be settled with the smallest possible 
 use of currency, and by concentrating into large centers 
 all offers for purchase or sale, so that on a common 
 meeting ground of buyers and sellers the exchange of 
 properties can be effected with the least expense, the 
 least risk, and the least delay. 
 
 To transform the unsalable individual part-ownership 
 or individual indebtedness into stocks and bonds having 
 a wide market, and to standardize merchandise, is an im- 
 portant step in the development of this time-, risk-, and 
 currency-saving device, without which modern banking 
 is inconceivable. 
 
 We have to add one more factor and a most important 
 one: the partial replacement of money by instruments 
 of credit must needs bring about, as a logical consequence, 
 the necessity of reserves of money to meet these credit 
 tokens, to redeem which cash may of right be demanded. 
 How large these reserves must be depends largely on the 
 strength of the confidence — the credit — upon which the 
 general structure is erected, and on the degree of per- 
 fection with which these reserves may be made available. 
 
 An ideal banking system is that which provides for the 
 legitimate needs of a country at moderate rates with the 
 maximum use of credit and the minimum use of cash, 
 which checks illegitimate or dangerous expansion or specu- 
 lation, and which avoids or minimizes as far as possible 
 all violent convulsions. 
 
 We need not emphasize the fact that the European 
 system comes very near accomplishing this ideal, while 
 our system has proved palpably inefficient. Recent 
 events have again brought it home to us that the richest 
 and soundest country of the world went into a disgraceful 
 state of temporary insolvency, while European nations. 
 
124 THE CURRENCY PROBLEM 
 
 poor by nature and loaded down with much heavier 
 burdens than we, have weathered similar storms without 
 any such panic and wholesale destruction of property 
 values. Let us consider, then, wherein our system diflfers 
 from theirs, and let us see which component parts are 
 missing in our machinery. 
 
 II 
 
 If we may anticipate our conclusions, we may say that 
 our methods are completely opposed to those of European 
 countries. 
 
 The European system aims at centralization, ours at de- 
 centralization. Europe believes in and has established 
 a system of central banks, issuing an elastic currency 
 which follows the requirements of commerce and trade 
 and is based, more or less, on bills of exchange; while 
 the United States has so far refused to reestablish a cen- 
 tral bank and persists in maintaining a system of inelastic 
 currency issued by 6500 banks. The European system 
 is built on modern bills of exchange, which form the quick- 
 est assets ; while in the United States, the rediscounting of 
 paper by banks being practically unknown, the chief quick 
 assets relied upon by the banks are call loans on stock- 
 exchange collateral. Europe has a system of general 
 banks with large capitals and branch banks all over 
 the country; we prohibit a similar branch-bank sys- 
 tem, and prefer a network of 20,000 small indepen- 
 dent banks and trust companies. Europe believes in 
 a system of monthly or half-monthly liquidations for 
 stock-exchange transactions, while the United States 
 maintains daily settlements. Europe has succeeded in 
 working out for each country clear, generally observed, 
 and uniform laws, regulating all commercial and financial 
 questions ; while in the United States not only do the laws 
 differ in the various commonwealths, but the underlying 
 
AMERICAN AND EUROPEAN BANKING 125 
 
 principles are not so clearly and so definitely laid down 
 as abroad, and every now and then the basis of the business 
 structure is violently shaken by some new interpretation 
 or legislation, or temporarily upset and endangered by 
 sweeping injunctions. 
 
 In order fully to understand the European system, it 
 will be necessary to explain at the outset the importance 
 of the bill of exchange in Europe in the financial inter- 
 course amongst individuals as well as amongst nations. 
 In the United States our commercial paper is the old 
 promissory note, it is a bill ; in Europe commercial paper 
 is a bill of exchange. I think that I cannot more forcibly 
 express the difference between the two. In the United 
 States this promissory note is an investment, in Europe 
 it is a means of exchange. If, in the United States, this 
 promissory note has entered the bank, it usually remains 
 there until it falls due ; if a New York bank, under normal 
 conditions, would try to rediscount such paper, it would 
 create suspicion and distrust. This means that every 
 dollar invested by a bank in American commercial paper, 
 that is, every dollar invested to satisfy the most legitimate 
 requirements of business, leads, without fail, to a locking 
 up of cash in unsalable assets. We have been shown 
 bricks of the time of Hammurabi, the Babylonian mon- 
 arch, evidencing the sale of a crop and similar transac- 
 tions, and I am inclined to believe that it was as easy, if 
 indeed not easier, to transfer the ownership of these 
 bricks from one owner to another, as it is to-day for an 
 American bank to realize upon its discounted paper. 
 
 Let us now observe the absolutely reverse method of 
 the European countries. In Europe there are scores of 
 banks and private banking firms that give their two or 
 three months' acceptances for the commercial require- 
 ments of trade, or that make it their specific business 
 to indorse commercial bills. A commercial borrower 
 
126 THE CURRENCY PROBLEM 
 
 in those countries who does not get a cash advance will 
 do one of two things : he will either sell to his bank or 
 his broker his own three-months' bill, drawn on a banking 
 firm willing to give him this credit; or he will sell the bill 
 drawn by him on his customer in payment for goods 
 sold to him, which bill may be subsequently passed on 
 with the indorsement of the banker. Through the addi- 
 tion of the established credit of the acceptor, or by the 
 various indorsements on the bills, the quality of the bill 
 becomes such as practically to eliminate the question of 
 credit and risk, and the conditions of the sale will depend 
 only on the rate of interest. From being a scarcely salable 
 promissory note, the ownership of which entails a more or 
 less pronounced commercial risk, the paper has been 
 transformed, if I may call it so, into a standard invest- 
 ment, the equivalent of which in cash can be easily 
 secured at any time. 
 
 This prime constituent of the European banking machin- 
 ery is entirely missing with us. Its existence is, however, 
 most important. Without such paper, the government 
 banks of Europe could not accomplish their work; and 
 vice versa, the role which this paper generally plays 
 in Europe's financial household is dependent on the 
 existence of central banks. The two cannot be sepa- 
 rated. 
 
 It is one of the main duties and privileges of the gov- 
 ernment banks to buy legitimate commercial paper, 
 with bankers' acceptances or bankers' indorsements. 
 As the government banks buy this paper, the circulation 
 of the notes which they issue in payment increases, and 
 on the other hand, as they collect this paper upon maturity 
 and reduce their discounts, their outstanding circulation 
 decreases. This means that they expand or contract 
 according to the requirements of trade. However, this 
 is not a merely automatic process. For as those intrusted 
 
AMERICAN AND EUROPEAN BANKING 127 
 
 with the management of the government bank see the 
 necessity of exercising a restraining influence, they raise 
 the rate at which the bank discounts, and in this they are 
 generally followed by the other banks of the country. 
 In the same way, if the government bank finds it advisable 
 for any reason to discriminate against the paper or the 
 securities of certain groups or individuals, general dis- 
 crimination by the other banks will usually follow. It 
 might be well to add that the European government 
 banks are not limited to the purchase of paper, but that 
 they also have the privilege of making advances within 
 certain limits upon securities up to a fixed percentage 
 of the market value, according to stated published sched- 
 ules. The rate, however, at which such advances may 
 be made as well as the government bank's discount rate 
 is uniform for everybody and is, as a rule, so much higher 
 than that of the general banks, and the restrictions as 
 to the character of the securities on which the government 
 bank may advance are so much more rigid, that in normal 
 times the bulk of the business is done by the general 
 banks. Only when the demand for money increases, does 
 the rate of the general banks begin to approach that of 
 the government bank; but in that case the government 
 bank will, as a rule, raise its rate, so as again to increase 
 the margin over that of the general banks. The govern- 
 ment banks consider themselves, more or less, as constitut- 
 ing the national reserve, ready to take an active part in the 
 nation's business only in times of emergency. A distinc- 
 tion is, however, carefully to be drawn between the ab- 
 normal crisis and what we may call the normal emergency 
 which arises regularly in consequence of certain economic 
 developments, like crop movements or particular require- 
 ments for special industries at fixed periods, and which, as 
 experience has shown, subside after a time as regularly 
 as they occur. When these normal emergencies arise, 
 
128 THE CURRENCY PROBLEM 
 
 the banks do not unduly raise their rate, but, for the time 
 being, meet all the requirements at a given rate, and allow 
 their circulation to increase, while the reserves go down. 
 When the government banks anticipate, however, that 
 more than a normal emergency will have to be dealt 
 with, they continue to raise the rates in order to protect 
 their reserves and to force liquidation, and in order to 
 deter all branches of industry and trade from entering upon 
 far-reaching new engagements. 
 
 The notes which the government banks are allowed to 
 issue are limited by the amount of gold and bullion 
 which must be held to cover them in full, or, as in Germany, 
 up to at least thirty-three per cent. It would, however, lead 
 too far astray to go into the details of these special regula- 
 tions which govern the issue of notes in the different coun- 
 tries. It will suffice here to outline the general rule. 
 Each government bank has a very decided interest in 
 keeping its gold holdings as large as possible, and in pre- 
 venting the gold from leaving the country. If an aug- 
 mented demand for money and credit accommodation 
 increases the amount of notes outstanding, the govern- 
 ment bank, by raising its rate, purposes not only to en- 
 courage a general contraction of business, and to force the 
 general banks of the country to contract, but also to 
 attract foreign money into the country. If England 
 has a private discount rate of, say, six per cent, that is, 
 if first-class commercial paper accepted or indorsed by 
 banks can be bought on an interest basis of six per cent, 
 and if, at the same time, there is in France a discount rate 
 of four per cent, it stands to reason that the big French 
 banks and the French public will invest in English bills, 
 and that French money will go to England. The same 
 holds good, of course, as to German, Austrian, Russian, 
 or Scandinavian bills. It is, for instance, well known 
 that at present, while rates in Germany are high and in 
 
AMERICAN AND EUROPEAN BANKING 129 
 
 France comparatively low, hundreds of millions of Ger- 
 man paper are held by the French banks. 
 
 The French banks would not buy the individual note 
 of an English, German, Russian, or Scandinavian mer- 
 chant whom they do not know; but they do know, and 
 must know, the value of the acceptance or the indorse- 
 ment of the foreign banks, which offer and indorse or 
 accept this paper. They would not buy this paper, unless 
 they knew that it can be rediscounted at any time through 
 the existence of a central bank in the home country. 
 None the less, however, the bulk of the business transacted 
 by a central bank is only a fraction of the total business of 
 the country, and is, in normal times, limited almost en- 
 tirely to the purchase and collection of short bills. The 
 mere existence of the central bank, however, enables the 
 general banks to discount freely ; and as everybody thus 
 discounts freely, there is the widest possible market for 
 discounts even without any active purchases by the central 
 bank. 
 
 While we cannot attempt to give any full description 
 of the working of central banks, it may be well to add that 
 some, like the Banque de France and the Reichsbank, 
 have hundreds of branch offices, spread all over the coun- 
 try, which, in Germany in particular, have developed 
 an admirable system of collection and of transferring 
 moneys from one place to another. It may also be interest- 
 ing to note that, contrary to a wide-spread idea, the central 
 banks of Europe are, as a rule, not owned by the govern- 
 ments. As a matter of fact, neither the English, French, 
 nor German government owns any stock in the central 
 bank of its country. The Bank of England is run en- 
 tirely as a private corporation, the stockholders electing 
 the board of directors, who rotate in holding the presi- 
 dency. In France the government appoints the governor 
 and some of the directors {regents). In Germany the 
 
130 THE CURRENCY PROBLEM 
 
 government appoints the President and a supervisory 
 board of five members, while the stockholders elect the 
 board of directors. The German government receives 
 three-quarters of the profits after the stockholders have 
 received a dividend of three and one half per cent. Thus 
 the central banks are independent of direct government 
 interference, or there is a joint control by government and 
 stockholders. But the government is the largest depositor 
 of the bank, and is thus obviously, both for its own credit 
 and for the welfare of the nation, vitally interested in 
 maintaining its credit at the highest possible notch. 
 
 The consequence of a broad bill market is, that, whereas 
 our banks keep against their deposits primarily call loans 
 on stock-exchange collateral, a European bank or banker 
 will keep against his demand obligations a large amount of 
 banking paper, which he can sell at any time at the dis- 
 count rate, without causing any such commotion as is 
 created with us when call money is rapidly withdrawn 
 from the stock exchange. 
 
 Call-money rates and their daily fluctuations do not 
 directly affect European stock exchanges. Europe has 
 developed a system of monthly or half-monthly settle- 
 ments on its stock exchanges, which means that from 
 one settlement to the other, the amount of cash required 
 by the stock exchange remains stationary. If, at the 
 settlement, it develops that commitments on the stock 
 exchange have increased, and that a larger amount of 
 money is needed for stock-exchange loans under normal 
 circumstances, so much more money will be withdrawn 
 from the bill market and go into the stock exchange. If 
 less money is wanted by the stock exchange, so much 
 more will go into the bill market. We cannot dilate 
 fully on the interesting question of the comparative merits 
 of daily versus monthly stock-exchange settlements. It 
 may, however, be said that if it is a saving not to settle 
 
AMERICAN AND EUROPEAN BANKING 131 
 
 each transaction by individually delivering and paying 
 for each purchase and sale, but to pay and deliver only 
 the balance of the whole day's transactions by one clear- 
 ing (without which it would be impossible to deal in a 
 million shares a day), then the saving would be still further 
 increased if the clearings covered not only one day, but 
 a whole week or a whole month. It might, however, 
 be asked: Why not then clear only once a year? The 
 answer is that, until the transaction is actually paid for, 
 there is a risk that with wide fluctuations one of the con- 
 tracting parties may not be able to pay the difference 
 between the price on the day on which the business was 
 concluded and on the day when it would be finally settled. 
 That is the reason why settlements in England do not 
 exceed two weeks, and why in New York they should 
 probably not exceed one week, for which period some 
 method of clearing the differences daily or of securing 
 them by collateral might easily be devised. 
 
 The present American system of daily settlements, 
 however, combined with the lack of a central bank and of 
 modern paper, brings about the shocking conditions from 
 which we are suffering. It is a fact that in Europe, where 
 settlements exist, such wild fluctuations as prevail with 
 us are unknown, except in our own securities. 
 
 Our much maligned stock exchange is the scapegoat 
 of the nation ; if trade contracts, the surplus money from 
 the Atlantic to the Pacific is thrown on the stock exchange, 
 creating easy money and encouraging speculation in 
 securities just at a time when speculation ought to be 
 slow. If industry and trade thrive, and are in need of 
 money, call loans are withdrawn from the stock exchange, 
 and, the more money is required by commerce and in- 
 dustry, the more the stock exchange will be depleted. 
 The usual consequence is our annual money panic, and 
 a resulting violent collapse of prices of securities. 
 
132 THE CURRENCY PROBLEM 
 
 This obnoxious system of cash dealings is forced upon 
 us as the result of our unreasonable usury law, which, 
 although making it unlawful to take more than six per 
 cent on time loans, is in reality the direct cause of an 
 almost confiscatory rate being charged from day to day 
 for weeks at a time. We shall dwell upon this law later. 
 The fact remains that with a legal limit of six per cent 
 for time money, and with the desire of the banks not to 
 charge merchants a higher rate, and with the lack of any 
 modern paper which we could offer to other nations, there 
 remain practically only two means of relieving the strin- 
 gency and of attracting foreign money. These are the 
 utilization of foreign credit, through long bills drawn by 
 our banks or bankers on Europe (and these could hardly 
 be used during the last crisis in consequence of England's 
 drastic measures) and incredibly high rates for call 
 money, that bring about wholesale realizations, and at- 
 tract foreign buyers at our bankruptcy prices. 
 
 Banks have been blamed for the high rates and for hav- 
 ing had so much money on the stock exchange. They 
 are absolutely helpless with regard to both. How could 
 a bank withstand a run, if it had all its money in unsalable 
 commercial paper, and how is a bank to meet the demands 
 made upon it otherwise than by drawing upon its quick 
 assets, viz. its call loans. It is our system that is wrong 
 from top to bottom ; it is this and not the individual that 
 is to be blamed in this respect. 
 
 The aggregate amount invested in trade and commerce 
 must vary. Its grand total should be many times the 
 amount invested in stock-exchange loans, which represent 
 the securities carried for speculative investors. Our 
 way of doing business may be illustrated by two adjoining 
 reservoirs, a small one and a very large one. The small 
 one represents the stock exchange and contains the call 
 loans; the large one represents the general business of 
 
AMERICAN AND EUROPEAN BANKING 13a 
 
 the country, as expressed by commerce and industry. 
 In Europe they regulate the small reservoir by pumping 
 water into it from the large one, or by withdrawing water 
 from the small reservoir into the large one. In this 
 way, the outflow and inflow in the large reservoir are 
 scarcely perceptible, and there is no difficulty in regulating 
 the small one. With us, we do the reverse. If there is 
 a shortage of water in the large reservoir, we begin to 
 draw on the small one and, in order to increase the water 
 in the large reservoir by an inch, we empty the small one 
 altogether or, in order to decrease the amount of water in 
 the large reservoir by an inch, we fill the small one to the 
 overflowing point. Moreover, Europe can tap a third 
 reservoir, the additional currency issued by a centra] 
 bank, with which to regulate the large reservoir if it fluc- 
 tuates more than a few inches, while with us no such final 
 reserve exists. As a consequence, fluctuations of several 
 feet appear to be inevitable and regular occurrences with 
 us. It may be added that not for many years has the Eu- 
 ropean reservoir shown such variations as this year, and 
 we must sadly admit that Europe's abnormal rates were 
 due largely to our own unbalanced conditions. Unable to 
 regulate our own household and to use our own gold, we 
 have accustomed ourselves to use and to abuse Europe, 
 which suffers intensely from our lack of a proper system. 
 
 Ill 
 
 Let us now add a few words about European and 
 American banks in general. 
 
 We have in the United States national banks, state 
 banks, and trust companies, practically without any 
 proper line of demarcation; they are all, more or less, 
 doing a similar business, except that the national banks 
 have the privilege and duty of providing currency against 
 government bonds. In Europe we find the privilege of 
 
134 THE CURRENCY PROBLEM 
 
 note issue restricted to the government banks, which are 
 hemmed in by such regulations as to keep them out of 
 speculative business or general commercial transactions. 
 Whenever a note-issuing bank desires to enter upon 
 general business, it has to abandon the privilege of issuing 
 notes. 
 
 Outside of the note-issuing banks the only European 
 banks that are regulated by law as to their investments 
 and their way of doing business are the savings banks. 
 For all other banks there is no government super- 
 vision, no laws as to their reserves against deposits, and 
 no restrictions as to indorsing or establishing branch 
 banks, etc. On the contrary, accepting, discounting, 
 and indorsing paper form the essence of Europe's bank- 
 ing, which is built up on a system of old, established, 
 very important, general banks with large capital and with 
 a network of branch offices and agencies all over the coun- 
 try, and in the centers with many branch offices in a 
 single town. On the whole, this system of making large 
 responsible banks and their branches the custodians of 
 the people's money is preferable to our system of allowing 
 a few, often irresponsible, men to get together, hire some 
 ground-floor corner, fit it up in marble and bronze, and 
 call it a bank, with a capital of $100,000, and often less, 
 and a corresponding surplus paid in, not earned. Small 
 banks constitute a danger, particularly so, if they ac- 
 cumulate deposits which are out of proportion to their 
 own resources. There is an old French and Italian 
 banking rule that deposits ought not to exceed four or 
 five times the amount of capital and surplus. This rule 
 is certainly a wise one for a country with such an imper- 
 fect banking organization as the United States. 
 
 While Germany and France may claim the best govern- 
 ment bank organization, there has been too much con- 
 centration in the business of the general banks of these 
 
AMERICAN AND EUROPEAN BANKING 135 
 
 two countries. The German and French banks have 
 accomplished a wonderful piece of work, but their system 
 of "taking it all," being banks of deposits, discounters, 
 acceptors, indorsers, brokers, and underwriters at the 
 same time, is not free from danger. Not that there is 
 risk of their getting involved, but there is too much elim- 
 ination of independent firms, which constitute a valuable 
 backbone, especially in times of need. In Germany, 
 where this process has been most marked, there is a strong 
 movement on foot to undo the harm that has been done. 
 
 The English system has, in this respect, so far proved 
 the best, for the reason that, while they have large deposit 
 banks with branch offices all over the country, they have 
 kept these deposit-and-check banks comparatively free 
 from commission, investment, underwiting, and kindred 
 operations. In England the investment and the commis- 
 sion business remains mainly with the broker, while the 
 contracting of large loans and the formation of syndicates 
 is generally left to private firms, or if it is a question of 
 South-American, Oriental, or colonial loans, to the banks 
 which confine themselves to business with these countries. 
 Again, there are foreign exchange houses and firms 
 conducting exclusively an accepting and indorsing busi- 
 ness ; and finally, there are the big discount companies. 
 One might say that every branch of these various enter- 
 prises is taken care of in an able and efficient manner in 
 England : business is done at fair rates and, at the same 
 time, substantial profits are earned. 
 
 In Europe the general banks are not required to hold 
 gold reserves. Gold reserves are kept exclusively by 
 the note-issuing central banks, which have outstanding 
 on demand obligations payable in gold. 
 
 We ought carefully to draw the line between a working 
 reserve and a gold reserve. A general bank has no need 
 of a gold reserve. But every general bank or financial 
 
136 THE CURRENCY PROBLEM 
 
 institution ought to have a large working reserve against its 
 demand obhgations. Such working reserve, however, need 
 not consist of legal tender notes, but of such assets as 
 can be quickly turned into cash credits; be it call loans, 
 bank paper, British Consols, or whatever can readily 
 be made available in times of stress. In addition, the 
 European banks generally have very large on-demand de- 
 posits especially with the central bank of the country, 
 and, of course, a substantial amount of actual cash as it is 
 required for the daily needs of the business. 
 
 But why should state banks or trust companies or 
 national banks, if they happen not to issue notes, carry 
 gold reserves ? For their own protection they need strong 
 working reserves, but, if it were not for our lack of a cen- 
 tral bank and for the shortcomings of our Treasury system, 
 why must they lock up legal tender notes to such an extent ? 
 
 In Europe the gold reserve and the emergency reserve 
 of the country are kept and managed by the central bank. 
 We have already shown how the government bank acts 
 in protecting the country and in providing for its needs. 
 Let us clearly understand, that without the bank rate, that 
 is, without the ability to regulate the rate of interest in 
 times when the government bank's cooperation is needed, 
 its efficacy would be nil. A system of modern banking 
 paper is absolutely necessary to establish this power of 
 the bank, and furthermore, a credit so firmly established, 
 that the higher rate of interest will act as an inducement 
 to invest and not as a breeder of distrust and an incentive 
 to realize. A further requirement is a system of large and 
 conservative banks that will cooperate, and that, as a mat- 
 ter of fact, cannot afford to abstain from falling in line 
 with the general tendency initiated by the central bank. 
 
 With such a system, a panic like the one from which 
 we are just emerging should be impossible. For no matter 
 whence money is withdrawn, it would turn up in another 
 
AMERICAN AND EUROPEAN BANKING 137 
 
 bank. It is inconceivable that conditions would now- 
 adays arise in either England, Germany, or France where 
 people would lose entire confidence in all banks, govern- 
 ment banks and savings banks, so that actual hoarding 
 and locking away of money would occur. Our worst 
 hoarders, the banks and trust companies, would, under 
 a European system, have no reason to lock up actual 
 money, since they would be fully protected by accumu- 
 lating a balance with the central bank. The unheard-of 
 fact that during a scarcity of currency the banks, instead 
 of disbursing their cash, begin to accumulate and actually 
 to hoard currency, would be an impossibility. 
 
 There are two different kinds of panics or crises with 
 which a nation may have to deal. One is a domestic 
 drain, created by strong domestic demands, degenerating 
 into a panic by some catastrophe engendering the fear that 
 the supply of money will reach an end. Such panics 
 must be met by paying out freely and boldly. Bagehot 
 says : "A panic, in a word, is a species of neuralgia; and 
 according to the rules of science, you must not starve it. 
 The holders of the cash reserve must be ready, not only to 
 keep it for their own liabilities, but to advance it most 
 freely for the liabilities of others. In wild periods of 
 alarm one failure makes many, and the best way to pre- 
 vent the derivative failures is to arrest the primary failure 
 which causes them." And further on he says : "It is not 
 unreasonable that our ultimate treasure in particular 
 cases should be lent ; on the contrary, we keep that treas- 
 ure for the very reason that in particular cases it should 
 be lent." 
 
 Another kind of panic may arise through a drain from 
 without. Such drain must be met in modern countries 
 by increasing the rate of interest until the tide has turned, 
 until the creditor finds it more profitable to leave the 
 money where it brings attractive interest than to with- 
 
138 THE CURRENCY PROBLEM 
 
 draw it. Both kinds of panics have been successfully 
 met, or have been entirely averted, in Europe by central 
 banks and by a firmly established credit. Germany, 
 for instance, without such a system, would now be in the 
 midst of a panic ; but she has safely avoided it, in spite of 
 her being, by nature, a poor country, while we, Natur'^'s 
 spoilt children, need only be wise to be rich and safe. 
 
 As it is, we neither can protect ourselves by a discount 
 rate, there being no discount system, no central bank, and 
 no legal rate beyond six per cent ; nor can we meet an in- 
 ternal panic because, irrespective of other shortcomings 
 of our system, it forces each bank to look out for itself 
 and to try to draw away the cash from the others, in order 
 to increase the amount in its own vaults, thus aggravating 
 the panic. While the only way to meet a panic should 
 be to pay freely, any bold action is paralyzed by the 
 frightful thought that there is no way of creating ad- 
 ditional currency, and by the knowledge that, if the 
 drain continues, there are no means of preventing whole- 
 sale individual failures unless general suspension of cash 
 payments is adopted. While one thousand millions 
 of dollars were lying idle in our banks and trust com- 
 panies as so-called reserves, that is, as the final resort 
 in case of need, this money, by virtue of the law, could 
 scarcely be touched ! What, then, is the use of such re- 
 serves, if they are not available in such times, and if, 
 even in contravention of the law, they could not be used 
 by one bank without fear of being ruined, unless all banks 
 agreed to use them freely ? And as it is impossible, even 
 without such a law, to make all banks act in the same 
 bold way, it follows that reserves should be concen- 
 trated, as they are in Europe, and that while the banks 
 may be asked to cooperate, they must be governed in 
 this respect by one central organ. 
 
 The question of treasury and government-bond secured 
 
AMERICAN AND EUROPEAN BANKING 139 
 
 bank-notes has been so fully and so ably dealt with by 
 Mr. Hepburn in a preceding address, that I can limit 
 myself to the hearty indorsement of what he said in this 
 respect. 
 
 The net result of our system is that immense amounts 
 of gold and currency are wastefuUy locked up, and that, 
 in spite of our immense gold treasure, which is four times 
 as large as that of England, and notwithstanding our 
 enormous 'per capita circulation of thirty-five dollars, we 
 suffer almost annually from acute scarcity of money. 
 
 If we only had the means energetically to contract our 
 currency, and to use our gold in a scientific and a practical 
 way, we should have gold and currency enough to meet any 
 panic. As it is, the amount of notes outstanding is about 
 stationary in times of activity or stagnation alike, while 
 as a consequence the rates for money vary between zero 
 and two hundred per cent. In Europe it is the reverse; 
 rates are fairly stationary and the amount of notes out- 
 standing contracts and expands. . With a cash balance 
 of $260,000,000 during the recent crisis, our government 
 had to incur new indebtedness to enable and to induce the 
 banks to issue additional currency. Within three months 
 the circulation increased through this artificial process by 
 eighty million dollars, but the government had to lose 
 about $1,000,000 of the people's money to reach this 
 result. On the other hand, the German Reichsbank issued 
 in one week, at the end of last December, M. 320,000,000 
 and the government received a five per cent tax on this 
 issue, which is borne by those who received the money. 
 These notes returned to the Reichsbank within less than 
 three weeks. 
 
 Our present system of maintaining and selling gov- 
 ernment bonds on a basis so high that only national 
 banks can buy them results in constant inflation of our 
 currency by about seventy-five per cent of the amount 
 
140 THE CURRENCY PROBLEM 
 
 of new government securities issued from time to time. 
 Inflation with practically no contraction ! It would be 
 cheaper and more straightforward if the government, 
 instead of issuing interest-bearing government bonds, 
 would issue new greenbacks. It amounts to the same 
 thing, and the government would in addition not lose the 
 interest. 
 
 Furthermore, our one-man-power system of the Treasury 
 is contrary to European ideas ; it is harmful to the country 
 and unfair toward the incumbent of the ofiice. While 
 our generation has been particularly fortunate in seeing 
 this office occupied by honest and able men only, the 
 danger remains, nevertheless, that this vast power may 
 one day be vested in less desirable men. Besides, the 
 laws governing the functions and powers of the Secretary 
 of the Treasury are old-fashioned, in parts too loose and 
 in parts too extreme, and not clearly defined, so that even 
 under the same President we find a radical change from 
 one method to another, according to the individual inter- 
 pretation by the incumbent of the office. 
 
 This lack of continuity is deleterious. Europe does 
 not give such vast and arbitrary powers to one single 
 political official, holding office only for a comparatively 
 short time, and often without proper business training. 
 On the contrary, the powers, clearly defined and properly 
 restricted, are vested in a permanent non-partisan body 
 of business men of the highest standard, thus constituting 
 a system which insures clear legal conditions, safety, and 
 continuity. 
 
 IV 
 
 A similar difference exists between the United States 
 and Europe as to general legislation governing banking 
 transactions and corporations. In dealing with these 
 questions it is not my intention to accuse anybody nor to 
 
AMERICAN AND EUROPEAN BANKING 141 
 
 excuse anybody; the only object of this investigation is to 
 explain certain fundamental shortcomings of our system. 
 
 Modern banking is built upon gold — and confidence. 
 The question of how to estimate working reserves, busi- 
 ness risks and profits, as well as the general valuation of 
 securities, all these are indissolubly interwoven with the 
 other question of how firmly established is the confidence 
 on which the whole structure rests and how far this confi- 
 dence is liable to be shaken in normal and in troublous 
 times. 
 
 The basis of confidence is an immutable belief in the 
 continuity of political and social conditions, which are 
 held to be safe and sacred. There must be faith in the 
 continuity of the form of government, in the continuity 
 of the legal status, and in the fair observance of law by 
 government and governed alike. There cannot, however, 
 be confidence in the continuity of the laws until they rest 
 on a broad, equitable basis, and are fairly uniform over 
 the entire country. There is nothing so harmful and so 
 dangerous as the existence of two laws, the one a written 
 law, unenforced and often impossible of enforcement, 
 the other a customary law, which stands unchallenged 
 for generations and which the written law cannot over- 
 ride, often because the latter, enacted in haste or hate, is 
 incompatible with reasonable business usages and necessity. 
 Just and uniform laws, universally observed and equably 
 enforced, imply wholesome government regulation. Loose 
 or extreme laws that cannot be observed and that, 
 therefore, are not generally enforced, but that may be 
 suddenly and spasmodically enforced according to the 
 whim of the people or of the party in power (yesterday 
 a dead letter and to-morrow a firebrand), imply anarchy 
 or autocracy. In financial matters Europe has advanced 
 far in attaining the former condition; we have made little 
 progress in emerging from the latter condition. 
 
142 THE CURRENCY PROBLEM 
 
 To cite only a few instances : 
 
 If the full taxes on capital, at present about 1.68 per 
 cent, were exacted and paid, no capitalist could remain 
 in New York. 
 
 If banks did not overcertify, our financial centers 
 would have to stop business. 
 
 If it had not been possible to pay rates far exceeding 
 six per cent for time loans, it would not have been pos- 
 sible a few weeks ago to draw so much gold from Europe, 
 where money rates were above six per cent, and the catas- 
 trophe would have been still worse than it was. 
 
 But, we venture to ask, why is it necessary to force 
 people to evade the laws in order to carry on business .'' 
 
 Among the important laws that have a distinct bearing 
 on the banking situation, and that are in great need of 
 revision, I should specify the following: 
 
 In the first place is to be put the usury legislation of 
 our separate states and especially of New York. The 
 usury laws in Europe, where they exist at all, apply only 
 where the borrower is in dire distress when seeking and 
 accepting a loan, and where the individual or corporate 
 lender knowingly profits from his helpless situation when 
 exacting usurious rates. Usury can be judged only in the 
 light of the surrounding circumstances ; and usury laws in 
 Europe generally apply only to individuals. Our law, 
 which prevents solvent firms of bankers, merchants, manu- 
 facturers, or brokers from contracting for money on time 
 at more than six per cent, implies not only undignified 
 tutelage, but unsound business judgment. The recent 
 crisis has shown that it was not taking advantage of peo- 
 ple in need to give them money on time at over six per 
 cent ; on the contrary, it would have been a blessing, 
 and in many cases their salvation, if they had been able 
 to receive the money at even a much higher rate. This 
 imsound and completely indefensible usury law is, how- 
 
AMERICAN AND EUROPEAN BANKING 143 
 
 ever, the reason why we must have daily settlements, and 
 in this and other ways it indirectly leads to frequent con- 
 vulsions of our money rates. 
 
 Secondly, the lack of a modern system for discounting 
 commercial paper in the United States is due to the want 
 of uniformity and precision in the laws governing bills of 
 exchange, bankruptcy, etc. This uncertainty as to pro- 
 cedure forces us to prefer the well-defined promissory 
 note — however unsalable — to the business of accepting 
 and indorsing commercial paper at the low commissions 
 customary in Europe. Furthermore, since our commer- 
 cial business is chiefly financed by the national banks, it is 
 a foolish regulation that prevents their indorsing or accept- 
 ing such paper to any extent, in order that they may carry 
 out the purely secondary object of issuing bank-notes. 
 
 Another difference between Europe and America that 
 affects the banking business is the regulation of the issue 
 of securities. 
 
 "Stock watering," that is, capitalization of earning 
 power and of good will, is permitted in England and France, 
 while it is not allowed in Germany. While, personally, 
 I prefer the German system, it is a mistaken idea to think 
 that the capitalization of earning power necessarily means 
 taking advantage of somebody. If the German sells at 
 two hundred per cent an industrial stock paying ten per 
 cent dividends, it amounts to the same as if the English- 
 man had sold at par twice the amount of shares on which 
 five per cent dividend is paid. But whether we adopt the 
 one system or the other, it is of the first importance that 
 the public should be fully informed as to the real value 
 of the stock which it acquires, and that the law should 
 be clear and definite in its terms and equal, rather than 
 erratic, in its enforcement. 
 
 In Germany the law makes all public offerings of 
 securities and applications for listing on the stock exchange 
 
144 THE CURRENCY PROBLEM 
 
 dependent on the publication of a full prospectus. This 
 document must contain all facts of importance concern- 
 ing the security offered and must be submitted to, and 
 approved by, a state commissioner. Anybody withhold- 
 ing information, or furnishing wrong and misleading 
 information, is criminally liable. At the same time, the 
 law requires that balance sheets be published regularly 
 and, where the issue deals with a new flotation, the 
 prospectus must state clearly the value and the price of 
 the properties transferred to the corporation at the time 
 of its incorporation, and in certain cases also the names 
 of those from whom they were bought. 
 
 We come finally to one of the most important of the 
 subsidiary points affecting our banking system, namely, 
 the relation of the directors to the corporation. In most 
 of the European countries, particularly in Germany and 
 France and, to a certain extent, in England, this relation 
 departs radically from our custom. The French and Ger- 
 man corporation is managed by a board of directors and 
 salaried managers. The latter are not members of the 
 board, as is the managing president with us. The board 
 of directors in Europe supervise the managers, who have 
 to report to the board about their acts and proposed acts, 
 in order to secure their sanction. The rule is that both the 
 managing officers, whose fixed salaries are comparatively 
 small, and the board of directors share in the profits of 
 the company. The stockholders ordinarily receive the 
 first four per cent, while of the surplus over four per cent, 
 a certain proportion goes to the managing officers and 
 their staff and to the board of directors. As the corporation 
 grows, the percentage going to the directors and the man- 
 agers is frequently modified to whatever the shareholders 
 consider a fair compensation. The net profit of the forty- 
 five important German banks for 1906 was M. 231,000,000. 
 The aggregate capital of these banks was M. 2,198,000,000 
 
AMERICAN AND EUROPEAN BANKING 145 
 
 with a surplus of M. 542,000,000, making their total 
 resources M. 2,740,000,000. Of this net profit about 
 M. 200,000,000 were paid out ; about one-seventh, viz. 
 M. 28,000,000, was paid to the managers and staff and 
 to the directors, while the remaining six-sevenths, being 
 M. 171,000,000, were paid to the stockholders, being an 
 average dividend of 8.07 per cent. 
 
 The underlying idea is a very different one from our 
 own. The European maintains that, in order to hold 
 any one liable in case he does not perform his duty, one 
 ought to pay him if he does. In Germany, for instance, 
 if a director does not act with what would be deemed 
 ordinary business prudence, and if he. neglects his duties, 
 so that the company suffers loss, he is made personally 
 liable. In the very rare cases of bad bank failures which 
 Germany has witnessed, like that of the Leipziger Bank, 
 — which, however, owing to Germany's admirable sys- 
 tem, passed by without any panic, — the directors, amongst 
 whom were men of many millions, lost all they pos- 
 sessed. 
 
 While the law is thus very rigid, it does, on the other 
 hand, not require the director to be anything more than 
 honest, or than to use the utmost possible care. But the 
 board members in a bank, who receive quite a large 
 income through their share of the profits, realize that 
 they must in turn devote a good part of their time 
 and energies to the interests of the bank. All corpora- 
 tions, like the big shipping lines, the industrial concerns, 
 and the insurance companies, are run exactly on the same 
 system. As a result, the so-called dummy director, so 
 familiar to us, does not exist, because every director is 
 materially concerned in seeing to it that the interests of 
 the company are fully safeguarded at all times, and that 
 no one director or manager receives any profits that 
 might be detrimental to the corporation; while at the 
 
146 THE CURRENCY PROBLEM 
 
 same time this system makes the directors disinclined 
 to consent to over-capitalization. 
 
 With us, on the other hand, the laws and usages regu- 
 lating the relations of director to stockholder need much 
 modernizing. We do not pay our directors, for ten dollars 
 or so per meeting cannot be considered a remuneration. 
 Under the old system it was considered good style to be 
 on the board of a bank, as it was to be on philanthropic, 
 religious, or educational boards; membership was, in 
 fact, largely a social function. Or, on the other hand, 
 some individuals were willing to join a board without any 
 compensation, because it was their own business that 
 they were managing; e.g. their own railroad, for which 
 they had to supply the wherewithal themselves, and the 
 territory of which they had to open by taking up farming 
 or mining or by starting other industries. In such cases 
 they sometimes made money and sometimes suffered 
 heavy losses ; but on the whole, it was this system of di- 
 rectors as chief stockholders and ever active prospectors, 
 assuming large risks themselves, that developed the 
 country and made it what it is to-day. 
 
 In the course of time, however, as the corporations grew 
 in size and number, directorship ceased to be a social 
 function, and the corporations ceased to be the property 
 of a few. They became the property of a large com- 
 munity of stockholders, and the directors, from being 
 majority stockholders, slowly became trustees. 
 
 With the evolution of the modern conception of trustee- 
 ship has come the present tendency to endeavor to tie the 
 director hand and foot and to hold him liable if anything 
 goes wrong with the corporation. But let me ask, what 
 right has one shareholder substantially to say to the other : 
 " Go on the board, work for me, worry for me, give your 
 time and spend your energy : we shall not pay you for it ; 
 but I shall hold you strictly accountable if anything happens 
 
AMERICAN AND EUROPEAN BANKING 147 
 
 to my company. If you chance to have a business of your 
 own, and if you find anytime left for it, be very careful not to 
 do any business with my company. Leave that privilege to 
 me. Because you work for me, you lose that privilege ; and 
 because I do not work for you — I retain it." That is 
 virtually the present attitude of the American stockholder 
 and to a certain degree the legal status of the director. 
 Let us do as the Europeans do, let us remunerate our 
 directors in proportion to the dividends they earn for us, 
 and then we shall not only have the full right to hold 
 them liable and to ask them to give up certain privileges, 
 but we shall at the same time have greater certainty that 
 every director will be careful to do his best. 
 
 Banking, like almost all other commercial transactions, 
 is in reality an insurance business. For each risk, we 
 ask and receive a premium commensurate with the hazard 
 of the transaction. In a city built on volcanic ground the 
 insurance premium is high. Bankers' profits in America 
 are higher than in Europe; but they must be high so 
 long as, for lack of modern banking methods and of uni- 
 form and well-established laws, we live financially on 
 volcanic ground. We have just passed through a pretty 
 lively earthquake, and the losses which wiped out the 
 profits of years show conclusively that the premiums 
 earned were not too large, in proportion to the risk. Do 
 not let us blame the insurance company, but let us be 
 doubly careful to build only in steel and stone and let us 
 build on solid ground. For, luckily, in this instance it 
 is within our power to transform that volcanic ground into 
 a solid foundation. 
 
 We are apt to think that our problems are peculiar to 
 us and that we must find our own way of solving them. 
 If we had only realized that American and European 
 history is being written with the same ink, that man is 
 man, with similar virtues and similar vices, on both sides 
 
148 THE CURRENCY PROBLEM 
 
 of the Atlantic, we might have learned much from ex- 
 perience, and might have been able to avoid much ama- 
 teurish and harmful legislation. 
 
 Germany also had many sovereign states which ulti- 
 mately formed a union. In each of these states there was 
 a different legal system, — German law, Roman law. 
 Code Napoleon and all kinds of local laws. Yet 
 Germany organized a commission, which worked for 
 twenty-five years and which finally completed a code 
 of laws to govern the entire country. A uniform com- 
 mercial code had, in fact, been created far earlier, and 
 Germany has now for many years been enjoying the ad- 
 vantages of uniformity. With us, also, there are surely 
 many questions, social as well as commercial, on which 
 the East and the West, the North and the South, can 
 agree, and where uniformity of state legislation can be 
 secured — if for no other reason than to avoid the much 
 disliked federal regulation. 
 
 In Germany, Sweden, and Switzerland — the last of 
 the countries to adopt a central bank — we find that 
 obstinate opposition was long directed against the creation 
 of such a central institution, chiefly by the then exist- 
 ing numerous banks of issue, which feared lest their busi- 
 ness might suffer. In each country in turn the very 
 banks that were forced to abandon the right of issue 
 in order to become banks of discount and deposit acknowl- 
 edge to-day that they have derived nothing but profit from 
 the change, and that the central bank has conferred unal- 
 loyed benefit on the entire country. 
 
 V 
 
 While our investigation has disclosed the nature of the 
 ideal, it has, at the same time, also made it evident that 
 we are still far removed from this ideal; so far, in fact, 
 that any attempt to reach it immediately would be futile. 
 
AMERICAN AND EUROPEAN BANKING 149 
 
 We can, indeed, advance only step by step, but I am con- 
 vinced that we shall never attain the summit of our am- 
 bitions or reach a completely satisfactory condition until 
 we have worked our way to a central bank and to the adop- 
 tion of clear and equitable statutes. We cannot secure 
 uniform laws promptly, but we can begin by modifying 
 some of the laws mentioned above, which are incompatible 
 with common sense, and by creating truly responsible 
 boards of directors like those in Europe. 
 
 We cannot have an effective modern central bank, be- 
 cause there are no modern American bills of exchange, 
 and we cannot create a sufficient amount of modern paper 
 without a central bank. We cannot have stock-exchange 
 settlements without the abolition of the usury law; but 
 even after its abolition we must have a bill market, before 
 we can do away with daily settlements and call loans, 
 based on these daily transactions. Nevertheless, every 
 one of these changes will have to be effected some day, and 
 it is all important that each successive step in currency 
 and banking reform be made with this end in view. 
 
 From this standpoint it is evident why neither the 
 Aldrich bill nor the Fowler bill can be deemed to be a 
 step in the right direction. Every measure is bad which 
 accentuates decentralization of note issue and of reserves ; 
 or which exclusively uses bonds as a basis for additional 
 
 circulation ; 
 or which gives to commercial banks power to issue 
 additional notes against their general assets with- 
 out restricting them in turn in the scope of their 
 general business, and without creating some ad- 
 ditional independent control, indorsement, or guar- 
 anty; 
 or which gives arbitrary powers exclusively to political 
 officers, often untrained in business, and usually hold- 
 ing office only for a short period. 
 
150 THE CURRENCY PROBLEM 
 
 A central clearing house, with power to issue against 
 clearing-house certificates notes to be guaranteed by the 
 United States, would, in my judgment, form the best 
 solution for the time being. The creation of a central 
 clearing house with a capital of its own and with a limited 
 dividend, the surplus revenue going to the United States, 
 would leave present conditions undisturbed, and, while 
 offering immediate relief, would at the same time form 
 a sound basis for future developments. The plan would 
 possess the following advantages : — 
 
 1. The clearing house would have its own gold reserve. 
 
 2. It would centralize the additional note issue and 
 would therefore do better service in permitting legitimate 
 expansion as well as in forcing effective contraction, 
 which, with sixty-five hundred independent note issuers, 
 is well-nigh impossible. 
 
 While additional notes issued by a bank mean an in- 
 crease of deposits, which may perhaps be called any day 
 or which, on the other hand, may remain forever, an 
 advance by the central clearing house would be madelo 
 the banks for a given period, after which the money must 
 be returned. It would, therefore, be safer for the banks, 
 and would at the same time insure contraction after a 
 certain time, as in Europe. 
 
 3. The central clearing house would be able to accommo- 
 date commerce and industry in times of need by accepting 
 commercial assets, provided that they are recognized 
 as legitimate and safe by the indorsement of the local 
 clearing houses. 
 
 4. It would leave our national banks without any further 
 independent note-issuing power, and would in this re- 
 spect be beneficial; for additional note-issuing power 
 should logically carry with it further restrictions as to 
 their privilege of doing a commercial business, whereas 
 their privileges in this respect should rather be increased. 
 
AMERICAN AND EUROPEAN BANKING 151 
 
 5. Through the share in the profits reserved for the gov- 
 ernment, the latter would receive some return on the funds 
 which it would deposit with the banks through the central 
 clearing house, whereas at present the government does 
 not receive any such return. 
 
 6. It would form a medium through which gold loans 
 might be contracted with European government banks in 
 a way similar to that by which transactions have been 
 concluded between the Bank of England and the Banque 
 de France. 
 
 7. If there were formed to supervise the manage- 
 ment of the central clearing house a central board ad- 
 ministered by salaried managers, as in Europe, and 
 comprising business men, largely selected from the 
 clearing-house committees, as well as political officials, it 
 would eliminate the arbitrary powers which the Secre- 
 tary of the Treasury is now called upon to exercise, 
 and it would create a continuity of policy, which is most 
 essential for the development of the country. 
 
 8. Finally, it would show that this country is able to 
 produce a body of men as honest, as trustworthy, and as 
 efficient as those into whose hands Europe has confided 
 the care of its central banks. As the confidence in this 
 body grows, as the banks come to feel its beneficent in- 
 fluence, the powers of this clearing house may gradually 
 be increased, and thus from the joint indorsement by the 
 clearing houses we may gradually gain our way to the 
 indorsement and acceptance by individual banks, so that 
 we may finally be able to develop a central organ which, 
 safeguarded from political and from financial domina- 
 tion and rigidly restricted as to its scope of business, will 
 place us financially in a sound and healthy condition and 
 which will cause us in this domain, as in others, to be 
 respected as a modern and a completely civihzed nation. 
 
THE MODERN CORPORATION 
 
 BT 
 
 GEORGE W. PERKINS 
 
THE MODERN CORPORATION 
 
 In the modern corporation we are confronted with a 
 fact and not a theory. Whatever may be the individual 
 attitude toward it, the corporation is here. What caused 
 it, what it is doing, and what is to become of it are hve 
 questions, vital to all the people. 
 
 A corporation, in a way, is but another name for an 
 organization. Broadly speaking, the first form of organi- 
 zation between human beings, of which we know, was 
 the clan or tribe, in which the everyday conduct of the 
 individuals was determined by the necessities of the 
 group. This passed on into national organization, and 
 then came the church as a growing and vast organiza- 
 tion. Latest of all has come the organizing of business. 
 
 But before all this, in the very beginning of things, 
 the universe was organized; and all that man has done 
 in society, in the church, in business, and all that he ever 
 can do in the centuries to come, can never bring to pass 
 so complete a form of organization, so vast a trust, so 
 centralized a form of control, as passes before our eyes 
 in each twenty-four hours of our lives as we contemplate 
 that all-including system of perfect organization called 
 the Universe. It does not require a very vivid imagina- 
 tion to picture the waste, the destruction, the chaos, that 
 would follow if there were not perfect organization, perfect 
 cooperation, perfect regulation, perfect control in the 
 affairs of the universe. How could we live, for example, 
 if there were constant competition between day and 
 night or a constant struggle for supremacy between the 
 seasons ? Does any one, for a moment, think that he 
 
 155 
 
156 THE CURRENCY PROBLEM 
 
 would prefer such a condition to the cooperation that 
 now exists through all the affairs of the universe ? 
 
 Organization being the all-permeating principle of the 
 universe, the presumption is, therefore, in favor of organi- 
 zation wherever we find it or wherever it can be used. 
 The corporation of to-day is entitled to that presumption ; 
 its underlying cause is not the greed of man for wealth 
 and power, but the working of natural causes — of 
 evolution. 
 
 Business was originally done by individuals trading with 
 one another ; then by a firm of two or more individuals ; 
 then by a company; then by a corporation, and latterly 
 by a giant corporation or what is commonly (though 
 perhaps inaccurately) called a "trust." Each step was 
 brought about by some great change that took place in 
 the conditions under which the people of the world lived 
 and worked; each step was, in fact, mainly determined 
 by discoveries and inventions of the human mind. 
 
 With the ox-team and the hoe we had men trading as 
 individuals with individuals; with the sailing vessel and 
 the stage-coach we had trade carried on by firms; with 
 the advent of the company we had the locomotive, the 
 steamboat, the reaping machine, and the telegraph; 
 with the birth of the larger corporation we had the express 
 train, the Atlantic cable, the ocean liner, the local tele- 
 phone, the seeder, the reaper, and the binder; with the 
 giant corporation came the Twentieth Century Limited, 
 the crossing of the ocean in five days, the long-distance 
 telephone, wireless telegraphy, and a great extension of 
 machinery into agricultural work. 
 
 In our forefathers' time it took about half as long to 
 sail down the Hudson River from Albany to New York 
 as it now takes to cross the Atlantic. The actual distance 
 from Albany to New York is no less, nor is the distance 
 from New York to London any less, now than then ; but 
 
THE MODERN CORPORATION 157 
 
 the inventions of man have so compressed both space 
 and time that the financial and commercial markets of 
 America and Europe are in constant exchange with one 
 another every moment of the day. The business man in 
 New York or Chicago can exchange several cable messages 
 with London or Paris during the business hours of a day, 
 and whenever an hour is clipped off the record of an ocean 
 greyhound the people of the world are drawn so much 
 nearer together. Because of the inventions of man, the 
 great American desert of our boyhood geographies has, 
 within a comparatively few years, largely become a vast 
 fertile field; and, again because of these inventions, 
 coupled with organized business methods, the product of 
 this vast field is being marketed in remote parts of the 
 globe. 
 
 The days when business was a local affair of individual 
 with individual were the days when people were scattered, 
 knowing little of each other and having no dealings with 
 each other outside the radius of a few miles. Then 
 steam and, later, electricity came into man's service; 
 and then, by leaps and bounds, the possibilities of trade 
 became extended to a radius of hundreds of miles, even of 
 thousands of miles. Vast possibilities of international 
 trade loomed up. The corporation sprang into active 
 being as an inevitable result of this expansion of trade; 
 for no one man, no firm, no small company, could provide 
 the capital or the organization to cope with such oppor- 
 tunities. The only bridge that can span the ocean is the 
 corporation. The real cause of the corporation was not 
 so much the selfish aims of a few men as the imperative 
 necessities of all men. 
 
 The first stage of corporationism was one of conflict — 
 the old destructive competition carried forward under 
 the new business forms. Trade could be carried farther, 
 much farther than before ; and so A invaded B's territory 
 
158 THE CURRENCY PROBLEM 
 
 and B retaliated. The fighting became faster and more 
 furious, and the war in commerce became a hand-to- 
 hand conflict. The trenches were being filled with able, 
 splendid men who fell in the colossal struggles. Cut 
 rates and rebates became the order of the day. Many 
 railroads and many houses which had been successful in 
 legitimate lines of business went down in bankruptcy. 
 Labor suffered and the public suffered. The cost of 
 doing business steadily increased, for war costs money. 
 It became imperative that something be done to end 
 the havoc. Prosperity could come only with peace. In- 
 stinctively, in a way unconsciously, men began to get 
 together, not so much for profit as for protection ; and 
 so, under conditions which, in the mechanical develop- 
 ment of the world, came on as naturally as day follows 
 night, the great corporation came into existence and is the 
 live, burning issue of to-day. 
 
 Perhaps the most useful achievement of the great cor- 
 poration has been the saving of waste in its particular 
 line of business. By assembling the best brains, the best 
 genius, the best energy in a given line of trade, and co- 
 ordinating these in work for a common end, great results 
 have been attained in the prevention of waste, the utiliz- 
 ing of by-products, the economizing in the manufacture 
 of the product, the expense of selling, and through better 
 and more uniform service. 
 
 This same grouping of men has raised the standard of 
 their efficiency. Nothing develops man like contact with 
 other men. A dozen men working apart and for separate 
 ends do not develop the facility, the ideas, the general 
 effectiveness that will become the qualities of a dozen 
 men working together in one cause. In such work emula- 
 tion plays a useful part ; it does all the good and none of 
 the harm that the old method of destructive competition 
 did : the old competition was wholly self-seeking and often 
 
THE MODERN CORPORATION 159 
 
 ruinous, while the new rivalry, within the limits of the 
 same organization, is constructive and uplifting. Thus 
 the great corporation has developed men of a higher order 
 of business ability than ever appeared under the old condi- 
 tions ; and what a value this has for the coming genera- 
 tion ! The opportunity, the inducement it provides to 
 become all-around larger men than those of earlier 
 generations could become ! 
 
 We have heard many warnings that because of the great 
 corporation we have been robbing the oncoming genera- 
 tion of its opportunities. Nothing is more absurd. 
 The larger the corporation, the more certain is the oflSce 
 boy ultimately to reach a foremost place if he is made 
 of the right stuflF, if he keeps overlastingly at it, and 
 if he is determined to become master of each position he 
 occupies. 
 
 In the earlier days the individual in business left his 
 business, as a rule, to his children — the firm to its relations. 
 Whether or not they were competent did not determine 
 the succession. But the giant corporation cannot act 
 in this way. Its management must have efiiciency, — 
 above and beyond all else it must have the highest order 
 of ability; and nothing has been more noticeable in the 
 management of corporations in the last few years than that 
 "influence," so called, as an element in selecting men for 
 responsible posts, has been rapidly on the wane. Every- 
 thing is giving way and must give way to the one supreme 
 test of fitness. 
 
 And is it not possible that the accumulating of large 
 fortunes in the future may be curtailed to a large extent 
 through the very workings of these corporations ? Are 
 there not many advantages in having corporations in 
 which there are a large number of positions carrying with 
 them very handsome annual salaries, in place of firms 
 with comparatively few partners, the annual profits of 
 
160 THE CURRENCY PROBLEM 
 
 each one of whom were often so large that they amassed 
 fortunes in a few years ? A position carrying a salary so 
 great as to represent the interest on a handsome fortune 
 can be permanently filled only by a man of real ability, 
 so that in case a man who is occupying such a position 
 dies, it must, in turn, be filled by another man of the 
 same order; while the fortune might be, and most likely 
 would be, passed on regardless of the heir's ability. There- 
 fore, the more positions of responsibility, of trust, and of 
 honor, that carry large salaries, the more goals we have 
 for young men whose equipment for life consists of in- 
 tegrity, health, ability, and energy. 
 
 Furthermore, the great corporation has been of benefit 
 to the public in being able to standardize its wares, so that 
 they have become more uniformly good. Wages are un- 
 questionably higher and labor is more steadily employed, 
 for, in a given line of trade, handled to a considerable 
 extent by a corporation, there are practically no failures ; 
 while, under the old methods of bitter, relentless warfare, 
 failures were frequent, and failure meant paralysis for 
 labor as well as for capital. 
 
 The great corporation is unquestionably making general 
 business conditions sounder. It is making business 
 steadier, for one reason, because firms inevitably change 
 and dissolve, while a corporation may go on indefinitely. 
 It is making business steadier, for another and more 
 potent reason, because it is able to survey the field 
 much better than could a large number of firms and indi- 
 vidaals, and, therefore, vastly better able to measure the 
 demand for its output and, if properly managed, to prevent 
 the accumulation of large stocks of goods that are not 
 needed — a condition which often arose under the old 
 methods, when many firms were in ruthless competition 
 with one another in the same line of business, oftentimes 
 producing serious financial difficulties for one and all. 
 
THE MODERN CORPORATION 161 
 
 Broadly and generally speaking, the corporation as we 
 know it to-day, as we see it working and feel its results, 
 is in a formative state. In many eases actual and des- 
 perately serious situations caused it to be put together 
 hurriedly. In many cases serious mistakes have been 
 made in the forms of organization, in the methods of 
 management, and in the ends that have been sought. In 
 some instances the necessity for corporations has grown 
 faster than has the ability of men to manage them. 
 Yes, mistakes have been many and serious. But the cor- 
 poration is with us ; it is a condition, not a theory, and 
 there are but two courses open to us — to kill it or to 
 keep it. If you would kill it, you must kill the cause, or 
 the thing will come back to plague you. The principal 
 causes are steam and electricity. 
 
 Could anything be more dangerous to the public welfare 
 than steam and electricity themselves ? Then why not 
 prohibit their use and, so far as possible, abolish them.'' 
 Has any one ever suggested this .'' No. Why ? Because 
 their benefits were too apparent ; and so we have bent our 
 energies towards regulating and controlling them by using 
 all that is good in them and carefully protecting our- 
 selves from all that is injurious. If we are not willing 
 to exterminate the cause of corporations, we can never 
 permanently exterminate the corporation itself. There is, 
 then, but one thing left to do, viz. to regulate and control 
 them, to treat them as we have treated steam and elec- 
 tricity, to use the best that is in them and to protect our- 
 selves from the worst that is in them. 
 
 A large percentage of the mistakes of corporate manage- 
 ment have occurred because managers have failed to 
 realize that they were not in business as individuals, 
 but were working for other people, their stockholders, 
 whom they were in honor bound honestly and faithfully 
 to serve; further, that they owed a duty to the general 
 
162 THE CURRENCY PROBLEM 
 
 public and could, in the long run, best serve themselves 
 and their stockholders by recognizing that duty and re- 
 specting it. 
 
 Then, too, many of our corporations, being of com- 
 paratively recent origin, have, at the outset, been managed 
 by men who were previously in business, in some form or 
 another, for themselves ; and it has been very difficult for 
 such men to change their point of view — to cease from 
 looking at questions from the sole standpoint of personal 
 gain and personal advantage, and to take the broader 
 view of looking at them from the standpoint of the com- 
 munity of interest principle. 
 
 It is by no means clear that the danger point in the 
 development of corporations is found in the giant corpora- 
 tion. Indeed, it is more likely to be found in the corpora- 
 tion of lesser size, because the latter does not attract the 
 eye of the public sufficiently to have its managers impressed 
 with the fact that they are semi-public servants — respon- 
 sible, not only to their stockholders, but to the public as 
 well. It is easier and more natural for a giant corporation 
 to adopt a policy of publicity with the public and of fair 
 dealing with its associates in the same trade, because such 
 a course, from the broad, far-reaching view of the great 
 corporation, becomes the wisest, most successful course. 
 Then again, the relation of the giant corporation to its 
 labor is an entirely different relation from that of the small 
 corporation or the firm to its labor ; the officers and trustees 
 of a giant corporation instinctively lose sight of the interest 
 of any one individual because such interest at best is in- 
 finitesimal compared with the whole. This places the 
 officers and trustees of the giant corporation in a position 
 where they can look on all labor questions without bias 
 and without any personal axe to grind — solely from the 
 broadest possible standpoint of what is fair and right be- 
 tween the pubhc's capital, which they represent, and the 
 
THE MODERN CORPORATION 163 
 
 public's labor, which they employ. In short, they assume 
 on all such matters the attitude of the real trustee, the 
 impartial judge, the intelligent, well-posted, and fair 
 arbitrator. 
 
 The great semi-public business corporations of the coun- 
 try, whether they be insurance, railroad, or industrial, 
 have in our day become not only vast business enterprises, 
 but great trusteeships; and there would be far less 
 attacking of corporations if this truth were more fully 
 realized and respected. The larger the corporation be- 
 comes, the greater become its responsibilities to the entire 
 community. Moreover, the larger the number of stock- 
 holders, the more it assumes the nature of an institution 
 for savings. 
 
 It is not sufficient in corporate management to do the 
 best one can from day to day. Corporate responsibility 
 extends beyond to-day. It is the foresight, the planning 
 ahead, the putting the house in order for the storms of 
 the future, that are the true measure of the best and 
 highest stewardship as well as of the highest order of 
 managerial ability. 
 
 The corporations of the future must be those that are 
 semi-public servants, serving the public, with owner- 
 ship widespread among the public, and with labor so 
 fairly and equitably treated that it will look upon the 
 corporation as its friend and protector rather than as an 
 ever-present enemy, above all believing in it so thor- 
 oughly that it will invest its savings in the corporation's 
 securities and become working partners in the business. 
 It would have been impossible, in the day of the ox-team, 
 for people in every State of this Union to be partners in 
 any one business; and yet to-day we have at least one 
 giant corporation made up of partners resident not 
 only in every one of our States, but in almost every 
 coimtry in the world, and reinforced by thousands of 
 
164 THE CURRENCY PROBLEM 
 
 its own employees having become stockholders them- 
 selves. 
 
 During the past few months, when the campaign against 
 corporations was most intense, and when our country was 
 in a turmoil of business perplexity and doubt, the people 
 who, we are told, have so suffered because of the trusts and 
 are so bitterly opposed to their existence, have been 
 investing in these very securities to an unprecedented 
 extent. To illustrate : during the past year the stock- 
 holders of the Great Northern Railway have increased 
 in number from 2800 to over 11,000. The stockholders 
 of the Pennsylvania Railroad have increased from 40,000 
 to 57,000. The stockholders of the New York Central 
 have increased from 10,000 to over 21,000. During the 
 same period the number of the stockholders in the Steel 
 Corporation increased by over 30,000: the total num- 
 ber of individuals holding stock in that corporation 
 now exceeds 100,000, and the average holding of the 
 $868,000,000 of stock of the Steel Corporation is to-day 
 about 98 shares per person. Can there, then, be any 
 question that these great institutions have become semi- 
 public, and when we contemplate the alternative of ex- 
 terminating or of regulating them, must we not realize 
 that they are owned, not by a few individuals, but by a 
 vast number of people representing our thriftiest class.? 
 That these corporations have thus become not only vast 
 business enterprises, but great and growing institutions 
 for savings, surely imposes a new and more sacred re- 
 sponsibility, not only upon corporation managers, but 
 upon legislators as well. 
 
 E the managers of the giant corporations feel themselves 
 to be semi-public servants, and desire to be so considered, 
 they must, of course, welcome supervision by the public, 
 exercised through its chosen representatives who compose 
 the government. Those who ^sk the pubhc to invest 
 
THE MODERN CORPORATION 165 
 
 money in an enterprise are in honor bound to give the 
 public, at stated intervals, evidence that the business in 
 question is ably and honestly conducted ; and they should 
 be not only willing, but glad, that some authority, properly 
 constituted by our government, should say to stock- 
 holders and the pubUc from time to time that the manage- 
 ment's reports and methods of business are correct. 
 They should be wiUing to do this for their own relief of 
 mind, since the responsibility of the management of a 
 giant corporation is so great that the men in control should 
 be glad to have it shared by proper public officials repre- 
 senting the people in a governmental capacity. 
 
 There is scarcely a corporation manager of to-day, 
 who is alive to his responsibilities, to the future growth 
 of this country, and to the enormous opportunities before 
 us for foreign trade, who would not welcome this kind of 
 supervision could he but feel that it would come from the 
 national government, acting through an intelligent and 
 fair-minded official. To be faced, however, with the re- 
 quirement to report to and to be supervised and regulated 
 by forty or fifty governments, with varying ideas and laws, 
 of course suggests difficulties that are almost insurmount- 
 able obstacles. For business purposes, at least in the 
 larger business affairs of this country and from a practical 
 standpoint, state lines have been obliterated. The tele- 
 graph, the express train, and the long-distance telephone 
 have done their work. For business purposes in this 
 country the United States government is a corporation 
 with fifty subsidiary companies, and the sooner this is 
 realized the sooner we can get the right kind of supervision 
 of semi-public business enterprises and, in this way, give 
 the public the publicity and the protection to which it is 
 entitled in the conduct of business by corporations. In 
 no other way can the pubUc be protected from evils in 
 corporation management. 
 
166 THE CURRENCY PROBLEM 
 
 The criticism is often made that this would amount to 
 bringing business into poUtics. That depends. We have 
 at Washington a Supreme Court. Membership in that 
 most honorable body is the goal of every aspiring lawyer. 
 If, for distinguished service and ability, we honor lawyers 
 by promoting them to decide our most difficult legal 
 questions, why should we not honor our railroad men by 
 promoting them to decide our most difficult railroad 
 questions, our industrial men the industrial questions ? 
 For example : if we had at Washington a Railroad Board 
 of Control, and that board were composed of practical rail- 
 road men, would not membership in such a board come 
 gradually to be the goal of railroad men ? And does any 
 one, for a moment, think that if such a board were com- 
 posed of practical railroad men it would be especially 
 partial to railroad interests ? Certainly not. Once on 
 such a board, a man could not fail to recognize the great 
 responsibility and honor of the office and administer it 
 for the best interests of the public and of the railroads 
 at one and the same time. Thus the business man would 
 merge into the public official, no longer controlled by the 
 mere business view, and would act the part of a states- 
 man, to the improvement of governmental administration 
 and not to the lowering of its level. 
 
 This kind of expert, high-minded supervision would 
 not be opposed by the business interests of the country. 
 What they dread is unintelligent, inexperienced adminis- 
 tration. National supervision, under a law requiring 
 that those who supervise should be practical men, thor- 
 oughly versed in the calUng, would solve most of our diffi- 
 cult problems and be of the greatest possible benefit and 
 protection to one and all. 
 
 To such rational supervision may we not look forward 
 as a result of the sober second thought of the people and 
 our legislators, of their calming down from the bitter 
 
THE MODERN CORPORATION 167 
 
 denunciation of corporations which has been the prevail- 
 ing outcry for some years? 
 
 In spite of what apparently has been an almost per- 
 sistent determination to misunderstand his real purpose, 
 the fact is that President Roosevelt, from the time that 
 he was governor of New York down to his message to 
 Congress in January, 1908, has repeatedly proclaimed his 
 belief that modern industrial conditions are such that 
 combination is not only necessary but inevitable; that 
 corporations have come to stay, and that, if properly 
 managed, they are the source of good and not evil. 
 
 The next period in corporation development should be 
 a constructive one, constructive as to the relations of the 
 corporation to its labor and to the public, and this can 
 best be accomplished by the method of cooperation with 
 supervision. 
 
 It is almost heresy to say that competition is no longer 
 the life of trade. Yet this has come to be the fact, as ap- 
 plied to the old unreasoning and unreasonable competi- 
 tion, because of the conditions of our day. The spirit of 
 cooperation is upon us. It must, of necessity, be the 
 next great form of business development and progress. 
 At this moment many people are looking askance upon 
 the change, still believing in the old doctrine. They hold 
 to it for several reasons : first, because they have inherited 
 the belief; second, because they think that competition 
 means lower prices for commodities to the public ; third, 
 because they think it provides the best incentive to make 
 men work. This may have been the best-known method 
 at one time, but it is not and cannot be true in the 
 mechanical, electrical age in which we live. 
 
 The highly developed competitive system gave ruinously 
 low prices at one time and unwarrantedly high prices at 
 another time. "When the low prices prevailed, labor was 
 cruelly hurt ; when the high prices prevailed, the public 
 paid the bills. 
 
168 THE CURRENCY PROBLEM 
 
 From every point of view the cooperative principle is to 
 be preferred. It is more humane, more uplifting, and, 
 with proper supervision, must provide a more orderly 
 conduct of business, — freer from failure and abuse, 
 guaranteeing better wages and more steady employment 
 to labor, with a more favorable average price to the 
 consumer, one on which he can depend in calculating 
 his living expenses or making his business plans. 
 
 So much for corporations. Now may I detain you a 
 moment longer while I say a word to the young men who 
 are here to-day. 
 
 How hopeless would your condition be if the world 
 were perfect, if there were nothing left for you to do to 
 improve conditions, if those who had gone before had 
 finished the job! Really, can you imagine a condition 
 more discouraging, more hopeless to an oncoming genera- 
 tion ? Happily, this is not your situation. Our corpora- 
 tions have made mistakes. Many of these have been 
 pointed out. Things have been done wrongly. Many 
 of these wrongs are now being corrected. But in those 
 mistakes, in that mismanagement, lies the opportunity of 
 the man of to-day and of the young man of to-morrow. 
 Your task will be to search out and eliminate the bad in 
 all that has preceded you, retaining the good, preserving 
 and adding to it for the benefit of yourselves and of those 
 who follow you. 
 
 Let us, then, take the best that we find, cut out the worst 
 that we find, improve, develop, make more useful and 
 beneficial. , 
 
 In this great country of ours there stands out preemi- 
 nently the inventive genius, the masterful ability, the re- 
 sourcefulness, the courage, the optimism of America's busi- 
 ness men. At no period in the world's development have 
 there been in any given country at any one time so many 
 
THE MODERN CORPORATION 169 
 
 men of from twenty to thirty years of age, standing ready 
 to embrace so many opportunities and to move on to such 
 splendid achievements, as we have in our United States 
 to-day. It cannot be possible that these young men will 
 be pessimists, that they will miss the legion of oppor- 
 tunities that are theirs ! 
 
 I wonder if many of you realize how fortunate in one 
 respect alone you are as compared with the young men 
 in many other countries. You are not obliged to spend 
 a number of the most impressionable years of your lives 
 in compulsory military service, learning to obey orders 
 which have no relation to the realities of life and its 
 actual successes. Those precious years in this country 
 are given to you to observe, to learn, and to prepare for 
 the practical work of the world. Your individuality is 
 not hampered or circumscribed by your being molded 
 into a machine in your early manhood. You are free 
 to make of yourself what you will. What would the young 
 men of Europe give for their opportunities if some magic 
 wand could give them one currency, one language, one 
 government, one people, from London to Moscow ! 
 
 Success does not come by chance. It is an opportunity 
 that has been lassoed and organized. I doubt if a man 
 ever met with success, worthy to be called success, who 
 was not an optimist, who did not believe in something, 
 heart and soul, and who did not play fair. And remember 
 that when you set about a task which you really want 
 to accomplish, the work involved is not drudgery, it is 
 the most invigorating sort of play. 
 
 Do not lose your red blood ; whatever you are, wherever 
 or however you are situated, keep your heart warm and 
 your humanity at par. Push forward ; be of good cheer. 
 Believe in our people, in our methods, in our country, 
 in your neighbor and in yourself; and remember, if 
 you are going into business, that, after all is said and 
 
170 THE CURRENCY PROBLEM 
 
 done, — after your fortune is made, however great it 
 may be, — in the small hours of the night, in your heart 
 of hearts, the thing you are really going to enjoy, take 
 satisfaction in, and be proud of, the thing that will 
 carry you over the rough places, that will keep your 
 heart strong and your brain clear, will be the thought of 
 what you have done to help others, what you have left 
 to a world that has offered so much to you. 
 
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 History of Proprietary Government In Pennsylvania. 
 
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 The Province of New Jersey, 1664—1738. 
 
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 September, 1907. 
 
 Trade Unions and Trusts Henry R. Sbager 
 
 The Workingmen's Party of New York Frank T. Carlton 
 
 Slave Labor in the Charleston District Ulrich B. Phillips 
 
 Burgoyne's Troops Charles R. Lingley 
 
 De Facto Office K. Richard Wallach 
 
 The Education of Voters George H. Haynbs 
 
 The Ethics of Empire Henry Jones Ford 
 
 December, 1907. 
 
 Railroad Valuation Wm. Z. Ripley 
 
 The Legal Status of Trade Unions Henry R. SeAger 
 
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 The Office of Mayor in France Wm. Bennett Munro 
 
 The Roman Gens G. W. Botsford 
 
 Current Political Theory Wm. A. Dunning 
 
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