Page 269-270
A. D. 1909-1910. — The "Central Bank" Question. — In Boston, at the outset of President Taft's tour of the country in the fall of 1909, he made a speech on financial subjects which touched the old question of the need in the country of a Central Bank of Issue, as an instrument for the automatic or natural regulation of its currency, in quantity and distribution. This gave the opening to a revival of discussions which have been seldom heard since Jackson's time. A clear, succinct statement of the banking conditions which have revived this question, with explanations of what it involves, appears in the following, borrowed from a monthly financial letter sent out in November by the National City Bank of Chicago:
"The creation of a Central Bank of issue as a cure for the defects of our financial system is of such importance that a brief review of the proposition may be of interest to our clients;
"The business of banking is probably as sound in this country as in any other Our individual banks are, an a rule, prudently, honestly and capably managed. During normal times they deserve and enjoy the confidence of the public which they efficiently serve. Yet only two years ago they practically suspended because the system that is the relation of one bank to all the others — have collapsed. This occurred while there was more gold in the country than existed in several of the other leading commercial nations combined, and while nearly all of the twenty or more thousand banks in the United States were sound, solvent, and in normal condition. With over $900,000,000 of gold in the United States Treasury, and several hundred millions more in the country, we imported at great cost about §100,000,000 chiefly from the coffers of the Bank of England, which itself only held §165,000,000.
“The loss on investments and to general business by such a panic as that of 1907 is beyond computation. When we consider that we have had several such panics within the memory of living men, and that other and poorer countries possess the means of avoiding such conditions, we naturally ask what is wrong or lacking in our financial system as compared to theirs ?
"In times of trouble our reserves scatter. Theirs are massed. Our currency is rigid and cannot be quickly expanded to meet an emergency. Their currency is capable of instantaneous expansion. Our chief gold reserves are in the United States Treasury unavailable as a basis for such expansion. Their reserves are in great central banks — immediately available for currency expansion. Besides, under our national banking system, a bank in a non-reserve city with deposits of, say $1,000,000, keeps six per cent, or §60,000 in its own vault, and nine per cent, or $90,000, to its credit with a reserve city bank. In the reserve city bank, however, the §90,000 is merely a deposit against which it keeps an actual reserve of about §20,000. When trouble comes, therefore, and the bank in the non-reserve city decides to increase its cash reserves from six to eight per cent it calls upon its reserve agent for §20,000 cash, and when the reserve city bank has forwarded that amount, it has parted with all the actual reserve it has belonging to the non-reserve city bank, and it still has a deposit liability on its books of §70,000 against which it holds no reserve whatever.
" As it is a very natural and prudent thing for banks in non-reserve cities to increase their cash reserves by at least two per cent when trouble threatens, nearly all try to do so at the same time, and the result is that the threatened trouble becomes a reality. In short, when financial trouble threatens in any other great country the system provides relief and the danger is avoided, whereas, unfortunately, with us every step we take increases the trouble and helps it along until it is beyond control.
"Financial stringency existed in all the leading countries in 1907. Suspension of specie-payments and actual panic occurred only in the United States. They stopped abruptly at our borders, and Canada and even Mexico knew nothing of them. Manifestly, we need something! There is little difference of opinion on that score. But when we begin to discuss the remedy we have a wide divergence of views.
"Many favor asset or credit currency similar to that prevailing in Canada. The Canadian System of asset currency is excellent when joined to the branch banking system. But it is felt that it would be almost impossible to apply it to a system containing thousand of individual banks. The difficulty is that of providing adequate redemption facilities, without which the danger of currency inflation would scarcely be avoided. Several schemes to meet this difficulty have been suggested, but the best of them seem rather unwieldy.
"The proposal which seems to be gaining most ground is to establish a great semi-government bank to be added to our present system. To this bank would be transferred at once the government deposits now in national banks, and later a large part of the reserves of the banks in the central reserve, and possibly also the reserve cities. Like everything else, the bank would have to be an evolution. Years would pass before it would work into its proper position and exercise its full powers. Gradually, it is hoped, the United States Treasury could be done away with, and the government taken out of the banking business. Then all government funds would be deposited with the Central Bank. Its branches would take the place of our Sub-Treasuries. It would be the bank of banks, where other banks could re-discount their bills, or borrow on securities, receiving therefor currency to be issued by the Central Bank. This currency would be partly secured by a gold reserve, and partly by the general assets of the bank.
“If the $900,000,000 gold in the United States Treasury in 1907, held against an equal amount of notes, had been in a Central Bank it would have formed a sufficient basis for the issue of an additional $900,000,000 of currency, for fifty per cent reserve against currency would be ample. For such additional issue the Central Bank would, of course, receive acceptable banking assets. A far smaller amount, however, than $900,000,000 would have averted the panic. It seems clear that such an institution would provide the elasticity to our currency which we so much need, not only in times of stress, but every crop-moving season.
“There are many details which would require careful study, but to many competent to judge, the Central Bank idea seems to be the correct solution of the difficulty. The fact that all the other important countries of the world have adopted it ought to give it weight. Even little Switzerland came to it four years ago, and Japan, after adopting a system copied from ours, has established a Central Bank patterned after the Imperial Bank of Germany.
“Most of the objections raised seem to be largely based on sentiment rather than on argument. It is said to be ‘un-American,’ or that it would be ‘used by Wall Street.’ or that ‘it would get into politics.’ It would seem to us that if the system is the best, it should not be ‘un-American’ to adopt it, and that an illegitimate use of it by ‘Wall Street’ could easily be guarded against in its organization. To say that we cannot trust our government to properly use, and not abuse, the powers of a Central Bank is to say that it is inferior to the governments of Europe which have wisely used such powers for generations.
“There seems some danger that the bank would not pay unless it entered into competition with existing banks for regular commercial business; but we must remember that Central Banks are not expected to earn large dividends.
“We predict a long campaign of discussion before the right course appears clear to the American people; but it seems to us that the arguments advanced for a Central Bank are well worthy of the most earnest study.”
A. D. 1909-1910. — Powerful Combination of Banking Interests by J.P.Morgan & Co. — Early in December, 1909, the powerful banking house of J. P. Morgan & Co. obtained control of the Guaranty Trust Company and the Equitable Life Assurance Company, which latter controls the Equitable and Mercantile trust companies. In the former case it purchased the holding of the Harriman estate, and in the latter that of Thomas Ryan. At the beginning of the following month, by another deal with Mr. Ryan, the same firm acquired the Morton and the Fifth Avenue trust companies. The combined assets of the Guaranty, Morton, and Fifth Avenue trust companies were reported to be $259,000,000. Joined to the vast resources of the Equitable Life Assurance Company and to those previously controlled by the Morgan Company, the financial combination seems overpowering.
FINANCE AND TRADE. See, also (in this vol.), Tariffs, and Combinations.
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