uncle sam: at our last meeting you considered the very important element in banking, of reserves, and seemingly the final factor that enters into the structure of a bank. you have run the whole schedule off, i think. standard of value, money, currency, exchange, capital, credit, government credit as money and as currency, land credit as money and as currency and reserves. what else can there be?

mr. banker: i do not think there is any particular topic for us to tackle now, but the bank itself, and i want to be permitted in the outset to describe just what a bank is, and what it does. i do not think there is any single thing in business life that is so misunderstood. people think of a bank as a kind of mystery.

the banker is a merchant in money and credit, and precisely as you can say that a man is a hardware merchant, cotton goods merchant, grain and flour merchant, so you can say that the banker is a money and credit merchant. he deals in these two things.

let me illustrate this in a simple way. if mr. farmer should come to me to borrow a thousand dollars for three months, and i should make him the loan, as we say, i, as a banker, would buy his note, due in three months. that is just what happens every time a bank makes a loan; it simply buys the note. now, in all probability i would not give mr. farmer any actual money, but would simply give him credit for one thousand dollars on the books of the bank, so that he could draw his check against it. in other words, i would owe him one thousand dollars. i have created a debt to him of one thousand dollars; in short, i have traded debts with him. he has given me his note, which is a debt for one thousand dollars due[pg 225] in three months, and i have given him credit on the books of the bank, a debt due to him on demand. the transaction does not differ in the slightest degree from the trade of horses for cattle. let me demonstrate this. suppose that mr. farmer came to me and offered me two of his jersey cows for my horse and buggy, because he does not want the cows, but does want the horse and buggy to do a lot of running around. i want the cows to milk, and so make the exchange with him. he gets something that meets his pressing needs in the horse and buggy, and i get something from which i receive an income, the cows from which i get milk. this corresponds to the interest on his note, and by the way, the cream would be my profit.

mr. laboringman: that's it; you bankers are always milking the public, and the interest you get is all cream; all profit.

mr. banker: oh, no! it is not as bad as that. don't make such a mistake. the average cost to the bankers of the country, outside of any losses, is about 4 per cent upon their deposits for interest paid on deposits, rent for building, clerk hire and other general expenses. so you see that it is not all profit by any means.

but let me get right back to what i was saying. the banker is nothing but a trader who keeps an open shop for the purpose of trading his debts for the debts of his depositors; or to put it in another way, for the purpose of exchanging his credit for actual money which is deposited with him, or for checks and drafts that are deposited with him, or for promissory notes which he buys when he loans money to his customers, and gives them credit on his books for the amount of the loans. all these different things, money, checks, drafts and promissory notes are bought by the banker with his credit, and the greater the amount he buys with his credit the greater will be his debt. but, you will probably say[pg 226] these are his deposits. very true, but his deposits are his debts. don't forget that.

mr. lawyer: mr. banker, you have accurately described the situation, just as it exists today, and that, of course, is what we are interested in; but it seems to me as though it would be a great help to us to follow the development of banking, as we have it now.

macleod, the highest authority upon banking credit, and the theory of banking, used this language: "the first business of a banker is not to lend money to others, but to collect money from others."

bagehot used this language, in describing the business of the bank: "thus, a banker's business—his proper business—does not begin while he is using his own money; it commences when he begins to use the capital of others."

many writers have maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and that its sole function should be to exchange its credit for coin, and coin for credit; and that the quantity of the bank's credit should always be exactly the same as the coin it displaces. this principle is called the currency principle.

many banks in the world's history have been constructed on this principle, especially those famous banks at venice, hamburg, amsterdam and several others.

these cities, small in themselves, were the centers of great foreign commerce; and as a natural consequence, an immense quantity of coin and denominations of all sorts of different countries was brought by the foreigner who resorted to them. these coins were, moreover, greatly clipped, worn and diminished. the degraded state of the current coin produced intolerable inconvenience, disorder and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bag full of all sorts of different coins. the settlement of these bills, therefore, involved perpetual dispute—which coins were to be re[pg 227]ceived, and which were not, and how much each was to count for. in order to remedy this, it finally became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. in order to do this, the magistrates of those cities instituted a bank of deposit, in which every merchant placed all his coins of different kinds and nations. these were all weighed, and the bank gave him credit, either in the form of notes, or a credit on their books, exactly corresponding to the real amount of the bullion deposited. the owner of this credit was entitled to have it paid in full weighted coin on demand. these capital credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these bank credits, which were called bank money. the consequence was evident, as this bank credit, or bank money, was always exchangeable for money of full weight on demand; it was always at a premium.

these banks professed to keep all the coin and bullion deposited with them in their vaults. they made no use of it in the way of business, as by discounting bills. thus the credit created was exactly equal to the specie deposited and their sole function was to exchange specie for credit and credit for specie.

these banks were examples of the currency principle; they were of no further use to commerce than this, that they served as a safe place to keep money in—and they insured a uniform standard of payment for debts. they made no profit by their business, but those who kept their accounts with them paid certain fees to defray the expenses of the establishment.

later and during the civil war in great britain the goldsmiths of london began to receive the cash of the merchants on deposit. they not only agreed to repay it on demand, but to pay 6 per cent per annum for the use of it. consequently, in order to enable them to do that,[pg 228] the deposits necessarily became their property to trade with as they thought best.

when, therefore, these goldsmiths received this money on deposit, they gave in exchange for it, or issued to their customers a credit, or right to demand back an equal amount of money at will. and it must be noted that it is this banker's credit which in banking language is termed a deposit. the money itself is called an asset, or resource.

macleod says that in practice it will be found that in ordinary times a banker's balance in cash will seldom differ by more than one thirty-sixth part from day to day. so that if he retains one-tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times.

the banker, therefore, can see that if an amount of cash was sufficient to support ten times the amount of his liabilities, he might safely buy debts to several times the amount of cash in his hands.

from this you see clearly by evolution a banker is a trader, just as mr. banker said a few moments ago, whose business consists in buying money and debts by creating other debts. if he has taken actual money on deposit, he has bought it, and if he has received checks and drafts on deposit, he has bought them likewise with his credit.

thus, it is seen that the essential and distinctive feature of a bank and a banker is to issue credit payable on demand, and that this credit may be put into circulation and serve as money.

first: they might demand payment in cash; if they did so, the banker canceled his debt.

second: the banker, if his customer wished it, gave him his promissory note to pay him or the bearer on demand such sum as he might wish; this neither created nor extinguished a deposit, it merely recorded it on paper for the convenience of transferring it to someone[pg 229] else. this promise to pay was at first called a "goldsmith's note," and is now called "a bank note."

third: if the customer wished to make a payment he might write a note to his banker desiring him to pay the money to some particular person, or to his order, or to bearer. these notes were then called "cash notes," but are now called "checks."

now, it is perfectly clear that neither a bank note, nor a check creates any new right; it merely records on paper a right to have money which already exists, and it is used for the purpose of transferring that right to have money to someone else.

it will be noted now, and i want you to keep this observation clearly in mind, that all banks are banks of issue, that is issues of credit. macleod says that the very meaning of the words "to bank" is to issue a right of action or a credit, in exchange for money or other debts; and when once the banker has issued this right of action, or right to have money, to his customer by writing it down to his credit, it makes not the slightest difference as to his liability whether he delivers his own promissory note, that is a bank note, to his customer, or whether he merely creates the credit, and gives him the right to transfer it to someone else by means of a check.

when a person deposits money at the bank, it is not his intention to deprive himself of the use of it; on the contrary, he means to have as free use of it as if it were in his own purse. the depositor, therefore, lends his money to his banker, but yet at the same time has the free use of it, as the bank employs that same money in promoting trade; upon the strength of the money being deposited with the bank, it buys debts with its promises to pay, either in the form of "bank notes," or of credit on its books, several times exceeding the amount of the cash placed with it; and the depositors who sell the bank their debts, have the free use of the very same coin which the depositor has the right to demand; thus the lender that is, the depositor, and the borrower that is, the banker,[pg 230] have the same right at the same time to the free use of the same money. all banking depends on the calculation that only a certain small portion of each set of depositors will demand the actual cash, but that the majority will be satisfied with the mere promise, the "bank notes" or the credit on the books of the bank.

banking is a species of insurance; it is theoretically possible that a banker may be called upon to pay all his deposits at once, just as it is theoretically possible that all the lives insured in an office may end at the same instant; or it is theoretically possible that all the houses insured may be burned at the same hour. the depositors and noteholders of the bank of england could demand payment the same day. all the depositors and noteholders of the bank of france could demand payment the same day. all the depositors of any bank could demand payment the same day. but all banking, as well as all insurance, is based upon the expectation that these contingencies will not happen, and the average experience of life proves that they do not happen. a banker multiplies his debts to be paid on demand and keeps buying a sufficient amount of cash to insure the immediate payment of all claims which are likely to be demanded at one time. if a pressure comes upon him he must sell some of the securities he has bought, or borrow money on them.

when the customer discounts a note at his bank he parts with the property in it, just as when he sells any other article. the note becomes the absolute property of the banker and he may sell it again, or pledge it, or deal with it in any way that suits his own interests best.

the notes in the safe of a banker are exactly similar to the goods in the shop of a retail dealer. the retail dealer buys the goods from the wholesale dealer and sells them at a higher price to his customers; and, as he makes a profit by doing so, the goods are capital to him. notes likewise are goods, or merchandise, which the bank buys from its own depositors at a discount, or bear[pg 231]ing interest for a time, and as the bank makes a profit by so doing, the notes are capital to the bank precisely in the same way that the goods in the shop of the retail dealer are capital.

now, lest we shall be misled, i want to call your attention to an error which is very common. many persons not being aware that the word "deposit" in banking language means the credit created in exchange for money, checks, drafts or notes bought, when they hear or read that a bank has such an amount of deposits conceive or suppose that the bank has that amount of cash on hand to trade with.

when it is said that a bank has $10,000,000, $50,000,000 or $100,000,000 or $200,000,000 of deposits, they are not deposits in cash at all; they are almost entirely pure credit, and are exactly equivalent to just as many "bank notes." they are nothing but an enormous superstructure of credit built up on a comparatively small basis of reserves exactly like the note circulation. these figures do not show the quantity of cash at the command of the bank that can be traded with; but they show the quantity of business the bank has done, and the debts or liabilities it has created. these deposits, then, which so many think are cash, are in fact nothing but the credits the banks have created in exchange for the cash and notes which figure on the other side of the balance sheet as assets or resources.

this play of bank credit has been graphically described by joseph t. talbot, the vice-president of one of our largest national banks; he says: "a customer holding a bank note may present it for deposit and credit, instead of demanding redemption in cash. in this case, there is a conversion from the circulating form of credit, payable to bearer, back to a 'book credit,' payable to order, as was ordinarily the case. thus it will be seen that all these forms of 'bank credits' are interchangeable, one for another, at the pleasure of the holder of the credit. the difference between these[pg 232] several forms of credit involves no changes whatever in the bank's liabilities. they amount to about the same difference which exists, let us say, between a coupon bond and a registered bond. the one is payable to bearer, the other is not. at one time a bank note may best serve a customer's needs; at another time he might prefer a deposit in the bank; or again he might prefer 'exchange.' all these interchangeable uses of credit actually and continuously take place. it will now be clear that a circulating 'bank note' in the hands of the public does not differ essentially from a 'deposit credit' on the bank's books.

"if one of your local bankers were asked how much he allowed his bank to issue in cashier's checks, he would tell you that he issued whatever sums his customers wanted; either against their balances, or against new loans. he would tell you the same in respect of the amount of exchange he issued; his sole rule and guide being the amount of such credit which his customers require, and which he is in position to lend afresh, and to maintain against, or to redeem in cash, if demanded. if asked how long these obligations were allowed to remain outstanding, he would tell you that he had no control whatever over the period of their circulation; that these obligations stood out just as long as the holders wanted to use them in that form, and no longer; that his only concern was in being prepared to redeem the obligations on demand in cash.

"thus it is that the volume of bank credits, whether in the form of deposits, checks or notes, responds in a rise or fall according as there is legitimate trade demand; and over this the bank has no control, except by ceasing to make loans. this is why deposits increase as loans increase, and these increase as the volume of business increases."

now, if we understand the real nature of these so-called deposits, the reason for their diminution is plain. deposits fall because loaning stops. when you stop[pg 233] loaning, you stop creating credit. you can readily see that it is not a diminution of deposits in cash, but it is a contraction of credit, a refusal to make loans.

this erroneous notion of the real meaning and nature of deposits in banking language may lead to very great mistakes in estimating the stability of a bank. that a bank's stability depends on a due proportion being kept between the deposits or the liabilities and the cash; and it may very well happen that while the deposits are apparently mounting high, and might lead many persons to believe that the actual quantity of cash was increased, it might be nothing, perhaps, but a dangerous extension of credit. and if this were carried too far, the bank might be in the most dangerous position just when it was apparently most flourishing.

now, let us consider how a banker who has purchased either money or notes from his customers by creating deposits or debts, may be used by his depositors. that is how the depositors may use these credits. of course, every banker does business exactly in the same way, or practically so, and when their customers begin to use checks these different results may follow:

first: the actual money may be drawn out.

second: the credit may be transferred to the account of another depositor of the same bank.

third: the check may be an order to pay another bank. but in this case, if the first bank is ordered to pay the second bank so much, the chances are that the second bank will be ordered to pay the first bank practically the same amount. if the claims of the two banks on each other were exactly equal, the respective checks or orders are interchanged, and the credits readjusted to the different customers' accounts accordingly, without any payment in money. if it should happen that the claims of all the banks against each other exactly balanced, any amount of business might be carried on, without requiring a single dollar of gold coin. if the mutual claims of the different banks against each other[pg 234] do not exactly balance, it is only necessary to pay the differences in coin.

now, exactly to the degree that banks are brought into a closer relationship with each other by such means, the smaller is the quantity of coin required to carry on the business of the country; or the more gigantic is the superstructure of credit which can be reared upon a given reserve.

from what i have already said, you must all see that a merchant deals with credit; but a banker is a dealer in credit. a merchant brings his notes or debts, that are payable some time in the future, to the banker for sale, and the banker buys them for credits in the form of deposits, or debts payable instantly, which have precisely the same effect in commerce as so much gold. he reaps exactly the same profit by creating a credit in favor of his depositor as if he gave him the actual cash. the checks drawn against these credits so created by the banker circulate commodities in trade precisely in the same way that bank notes do which circulate commodities precisely in the same way that gold coin does. consequently, these bank credits so created by the banker, whether upon his books subject to check, or in the form of bank notes, are exactly equal in their practical effects, so far as exchanging commodities is concerned, to the creation of so much gold coin.

this being true, you must realize how absolutely essential it is that every bank credit must be kept as good as gold by current redemption in gold everywhere, whenever demanded.

mr. banker: mr. lawyer, in all that you have said you have only affirmed what i said in the outset; the banker is a shopkeeper, a trader exchanging his credit for money and debts.

the development of the banking business in the united states is most interesting, and its growth has been simply marvelous.

on feb. 25, 1863, almost fifty years ago, when the[pg 235] national banking system was inaugurated, there were in the eastern states, including new york, new jersey and pennsylvania, what are known as mutual savings banks. these institutions are run solely for the benefit of the depositors. this is upon the theory that those using savings banks are the wards of the state. these mutual savings banks have no capital and the trustees, or directors, serve without pay. there are today in the united states 650 of these mutual savings banks, with deposits amounting to $3,608,000,000. practically all of these mutual savings banks are located in the east, there being only thirty-one west of buffalo. these few got a start before the present conditions of banking grew up. today it is quite impossible to start a mutual savings bank anywhere, because the state banks and trust companies are able to pay such high rates of interest, owing to the fact that they can conduct the savings bank business as a part of their regular commercial business, or as a part of their trust company business. that is, the savings bank business is incidental to their regular business, and requires no separate and special organization. if there are any extra charges they would be nominal at most. the savings business being conducted over the same counter, this particular branch of banking may be regarded as done at no cost to them. under the circumstances it is very easy to see how the state banks, and those banking institutions more recently organized, known as trust companies, have absorbed all the savings business where the mutual banks had not already been permanently established.

another reason that has enabled them to do this is the fact that in most states there are no prescribed rules for the investment of savings bank deposits, and the banks are using the savings deposits for commercial purposes, and also in speculative ventures, particularly in the way of underwritings where the profits are much larger than could be realized from such funds if they were limited to investments of the highest order where,[pg 236] as you know, the rates of interest are comparatively much lower.

mr. merchant: how many such institutions are there?

mr. banker: there are today thirteen thousand three hundred and eighty-one state banks, with four hundred and fifty-nine million of capital and two billion nine hundred million of deposits.

side by side with these state banks are 1,292 state savings banks, with seventy-seven millions of capital and eight hundred and forty-three millions of deposits. these state savings banks differ only in name from the regular state banks. the only point to be noted in this connection is that the local statutes, or the laws of the state where the bank is located, always determine whether the name will be a state savings bank, or a state bank. it may be assumed that whatever the name, the business carried on is practically the same all over the united states, with here and there some slight difference, but no substantial variance.

mr. manufacturer: these institutions you have named do not include the trust companies, do they? there seems to be a perfect craze to start trust companies now. why is that?

mr. banker: within the past twenty-five years there has grown up, almost as if by magic, the class of banks you have just mentioned, differing from state banks and state savings banks only in one single respect, but that is an all-comprehending one. enterprising men in almost every state have secured the passage of laws for what they call a trust company business. generally speaking, what you cannot do under a trust company charter is some kind of a business that has not yet been thought of.

there are 1,410 of such trust companies, so called, with capital amounting to $419,000,000 owing individual deposits amounting to $3,674,000,000 with $450,000,000 additional liabilities, or something over four billion dollars, all told.

[pg 237]

this vast business has grown up outside of the national banking system, simply because the national bank could not, but these other institutions could develop along natural lines of business progress.

notwithstanding these obstacles, however, there is no kind of a banking business that the national banks of the country are not doing in some way or other. of course, they are not all of them doing all kinds of business, but they have worked out methods by which they can, if they desire to do so. of the 7,397 national banks, nearly half of them, 3,039, are now doing a regular savings bank business, without any express authority of law, and 2,340,226 depositors have deposited with our national banks $659,500,000.

who is there who does not know that either downstairs in the same building, or upstairs in the same building, or around the corner in some other building, with the back ends of the two buildings adjoining, many, if not all, the national banks have attachments, where they are carrying on the savings bank business and the trust company business under state charters. national banks are under national supervision, while the state banks and trust companies, owned and manipulated by them, are under state supervision, or possibly under no supervision at all.

there are many national banks holding the stock of other banks, either savings banks, state banks, or trust companies in their treasury, and some of them are holding the stock of two or more banks. only recently it was discovered that a national bank had invested ten million dollars, directly or indirectly, in other banks throughout the country; possibly an examination would show that this ten million was partly the stock of other national banks, and partly the stock of state bank institutions such as savings banks, state banks and trust companies.

now, if there is one holding company more to be criticised, and more to be abjured than any other, it is a bank holding company, controlling the stock of a great[pg 238] many other banks, particularly so under different supervision.

when we behold the malformation of banking as now carried on in this country, due to the struggle of the various institutions to adjust themselves to these new conditions and to take advantage of all the opportunities in modern business, it reminds one of the crooked, twisted, knotted, and sadly misshapen tree-trunk that has grown up amidst and between huge rocks, that stand in the way of an upright and symmetrical development. these huge bowlders and rocks are the obsolete laws on our statute books, our ignorance, our selfishness, our prejudice, our political cowardice and our demagoguery.

like our mutual savings banks, the original idea was that a trust company could only do a trust business in the strict sense of that word. they could hold a railroad mortgage, and pay interest to the bondholders, perform similar functions for other corporations, and could act as a trustee in case of estates. today you may assume that no kind of business will escape the scope of the charter of the so-called trust company, from the care of estates and the execution of corporate trusts to banking in all of its forms, and agencies of every conceivable kind. in other words, the all-round charter of the american trust company, popularly so called, permits it to do anything that the varied affairs of the american citizen may by any chance require.

just as there are in the east mutual savings banks, which are relics of former days, so the trust companies, with their limited powers, are only a landmark in the evolution of american banking, and must disappear as a separate institution in time.

the growth and development in fifty years has produced in the united states a banking unit, doing in a conglomerate way what it ought to be doing as a departmental business, with four distinct functions: viz., a commercial business, the manufacturing of credit; a savings bank business, accumulating the savings of the laboring[pg 239] masses, which is a sacred trust fund that should be placed in high grade investments; a trust company business, executing trusts, and carrying on agencies of every kind; a note-issuing business, which is only another form of the commercial business, as the bank note is in fact only another form, as we have learned, of a deposit—a circulating credit in place of a check credit for the convenience of the people.

from feb. 1, 1863, the birth of the national bank act, down to the present time there has not been one single change in the national bank law worth mentioning. it is true we have dotted an "i" here, and crossed a "t" there; but as for a substantial change there has not been a single one made. now, this is truly a most marvelous fact, when you consider how great have been the changes, especially since 1890, or during the past twenty-two years. our banking resources have increased fourfold. in 1890 they were about six billion, today they are more than twenty-five billion.

mr. lawyer: this growth in our banking power is not so strange because it only reflects the growth of our business. the clearings of the united states in 1890 were only thirty-seven billion, while the clearings this year must pass the hundred and seventy billion dollar mark. the productions of the united states in 1890 were only seventeen billion. the productions of the united states in 1912 will exceed thirty-five billion dollars. the wealth of the united states in 1890 was only sixty-five billion dollars. the wealth of the united states in 1912 is estimated at about one hundred and twenty-five billion dollars. the imports in 1890 were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in 1890 were eight hundred and forty-five million; this year our exports will exceed two billion three hundred million dollars.

mr. farmer: and do you mean to say with this vast, almost incalculable increase of production and wealth and consequent increase of banking resources, there has[pg 240] not been a single step taken by the national government to facilitate it?

mr. banker: mr. farmer, there has not been a single change made to facilitate the handling of this vast business. on the other hand, there seems to have been such a profound ignorance on the part of congress, or such an abject fear, lest they might aid business, that every progressive movement of a legislative character has been left to the states, which have given us laws as varied as jacob's coat of many colors; indeed, rivaling the fifty-seven varieties of the famous pickle man.

not only have they left the banking business to just "grow up" like topsy in uncle tom's cabin; but the government itself has been one of the greatest obstructionists to the national growth of our banking business in its interference with the natural movement of the money of the country which by every economic law, and business right, belongs in the channels of trade, and not in the strong boxes of the government.

mr. manufacturer: that is absolutely true. i was greatly impressed only yesterday by a statement made by the secretary of the treasury right on that point of government interference with current business by withdrawing money from circulation and piling it up in the vaults of the treasury. in the light of what we have learned during our talks, it is simply appalling; indeed, it does not seem possible in a civilized country.

secretary macveagh says in the outset, "no reform of your banking and currency system can be adequate which does not take the united states treasury out of the banking business," and then adds:

"when the independent treasury system was established the idea was that all the funds of the government should be stored in the treasury vaults in the form of money, just as the medi?val war lords kept their treasures in strong boxes. the independent treasury system was established in troublesome financial days, when the state banks were not the safest places for the[pg 241] deposit of money. the people decided that the public funds must be kept in government vaults for safety.

"in this country, with our rigid laws fixing the minimum reserves the banks must hold, any loss of cash by the banks means an instant contraction of their loaning power. if the banks of new york and chicago lose $100,000,000 cash, they must at once reduce their liabilities by $400,000,000. this means that they must reduce by that amount their loans to the business community.

"with the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. for this reason, an institution like the united states treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market.

"the funds held by the great european governments vary from $25,000,000 to $50,000,000. the coin, bullion, and paper money held as assets in the united states treasury during the present administration has varied from $300,000,000 to $350,000,000. in other words, nearly one-tenth of all the money in the country is held idle in the treasury vaults. if this money were all deposited in the banks it would increase their reserves 20 per cent.

"the receipts and disbursements of the treasury are most irregular. the treasury receipts in 1907 exceeded the disbursements by $91,000,000. two years later the disbursements exceeded the receipts by $118,000,000. for the past two years receipts have again exceeded disbursements. the general fund in the treasury was $272,000,000 in 1907; three years later it had fallen to $106,000,000. under our present system of keeping a large surplus government fund idle in the treasury these wide variations in the yearly balance not only seriously disturb the money market and the business of the country, but force the secretary of the treasury to en[pg 242]ter actively into the money market as a paternal overseer of the machinery of credit.

"it not infrequently happens that surplus revenues accumulate in the treasury just at a time when the banks are straining their resources to grant all the credits needed to finance a business boom. the treasury then takes money out of the banks and hoards it just at the time when the country most needs it. if the business boom goes so far as to strain credit to the breaking point, then the treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. in recent years the treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. in december, 1907, following the money panic, the special deposits in the banks by the treasury had reached $256,000,000. three years later they were reduced to $4,000,000. in the fiscal year 1908-1909, the treasury withdrew $100,000,000 from the banks.

"this state of affairs places in the hands of the secretary of the treasury a power greater than any american should have. the power of the secretary to influence the money market by deposits or withdrawals of public funds is always dangerous. no government officer should have this power. it has been a great burden, i believe, on the shoulders of every recent secretary of the treasury department.

"if the people realized how dangerous is the power in the hands of the secretary of the treasury, they would insist that the treasury be at once taken out of the banking business. accustomed as we are to government interference with the money market, few of us realize how the treasury in the past few years has exercised the central-bank function of regulating the discount rate. the treasury, by alternate deposits and withdrawals of the public money in the banks, as well as by other devices, has attempted to regulate the discount rate.

"the treasury department should be divorced from[pg 243] the money market and from the banking business, and the way to effect the reform is plain. we should have in this country a quasi-public institution not only to hold the ultimate cash reserves of the banks and to regulate the rate of discount, but to act as the fiscal agent of the government. such an institution would hold the government balances as deposits, and the government could check against them just as any large business concern checks against its balances in bank. with the government balances deposited in such an institution the business of the country would never be disturbed by the treasury hoarding up cash, and the secretary of the treasury would no longer be forced to meddle in the money market.

"as long as we have the present banking and currency system, we shall have panics—and no longer. does not this alone create a state of emergency? what doubt should there be of the urgency of this legislation? why should it take another wasteful and degrading panic to impress congress? why cannot 1907 suffice? there are many other things of prime importance to be secured through monetary reform, but if nothing were to be secured but emancipation from panics there would be abundant imperative reasons for immediate action by congress."

mr. merchant: this statement of secretary macveagh proves absolutely just what you said a moment ago, that the situation was appalling, and when you realize that this practice has been kept up ever since 1846, when the sub-treasuries were established, it is unbelievable.

the act of aug. 5, 1846, declared it a felony to deposit public money in banks.

the united states government has been committing an economic felony ever since. it has been committing an economic crime against commerce and the laboring interests of the country ever since that act was passed, and is doing it this very hour.

[pg 244]

the act of feb. 25, 1863, establishing national banks, authorized their use as depositaries of the public money except "receipts from customs." forty-four years later the act of march 4, 1907, struck out the words "except receipts from customs." by the act of march 2, 1911, bank checks were made receivable for customs dues, but no step has been taken by the treasury of the united states to make them so at new york, baltimore, boston, chicago, cincinnati, new orleans, philadelphia, st. louis, san francisco and washington, where the united states government still has its morgues for our money. every day the checks are presented which are sent in in accordance with the law, and the actual money is withdrawn from the channels of trade; that is, the united states government withdraws reserve money to the full extent of every dollar that is due it.

mr. lawyer: while mr. manufacturer was reading what secretary macveagh said, i have been wondering what the people would do if the united states steel corporation, the standard oil co., j.p. morgan or john d. rockefeller, or any of the railroad companies, or any other great interest, should collect and hold in safe-deposit boxes hundreds of millions of money, just as the united states treasury does.

mr. farmer: i'll tell you what we would do. we would blow them up mighty quick, and hang them to boot, that's what we'd do.

mr. merchant: gentlemen, just think what it means to withdraw these hundreds of millions of reserve money from the channels of trade, say in the fall, keeping in mind that every dollar that the government grabs and withdraws, will support from five to ten times that amount of credit. the withdrawal, as mr. macveagh said, of one hundred million dollars, means the contraction of from five hundred million to a billion dollars; this is not only a fool's practice, but it is an actual crime against the commerce of the country; a crime against the producers, a crime against the laboring men of the country.

[pg 245]

mr. lawyer: how long, o lord, how long, shall we remain the laughing stock of the rest of the world? but, let us see, can any man here give me a single reason why the united states government should not deposit its money with the banks, precisely as all the other governments of the world do? it seems to me perfectly clear that the united states government should treat its income precisely as this town does, this county does, this state does. is there any conceivable reason why it should not act in this matter precisely as new york city, chicago, new york state and illinois, and every city and every state does?

mr. banker: not one in the world.

mr. manufacturer: this discussion upon the development of banking in the united states and the present treasury situation brings out the necessary reforms most vividly to my mind from these two points of view, the banks, and the treasury.

first: assuming that we are all agreed as to the result of our talk last wednesday night upon reserves, that they must be national to be equal and adequate, our conclusions now are inevitable, (1) we must give to the national banks the power to do a savings bank business, as well as a commercial business; (2) we must give our national banks the power to do a trust company business; (3) we must give our national banks the power to issue a pure credit bank note precisely like that issued by the scotch banks and the canadian banks, and was issued by the five hundred banks in new england before the war. these notes will go to the clearing houses every day with the checks and drafts to be cleared at precisely the same time, and precisely in the same way.

second: we must take the united states government out of the banking business, so that its transactions will cease to be a disturbing factor in the everyday affairs of the commercial world.

mr. banker: you have outlined these necessary reforms splendidly, but there are just two more points in[pg 246] this connection that must not escape our attention. they are these:

first: all these various forms of banking are distinct in character and economically the funds of each perform a peculiar function that must be recognized and observed or we shall make a great fundamental error in constructing what we hope will prove a sound financial and banking system. we must provide that the commercial function, the savings function, the trust function shall be kept apart by separating the funds arising from each, and keeping them completely segregated, in order that the country may always know just what its commercial fund is, as distinguished from its investment fund.

second: there is such a great demand for farm mortgage loans by those who are pursuing agriculture that i am convinced that some provision should be made whereby the farmers of this country could obtain money upon their lands, as cheaply as our great railroads and other corporations are able to do. i have given this matter much study, and as you gentlemen are aware, i am a member of the committee appointed by the american bankers' association to investigate and report the best method possible to accomplish this purpose. therefore i think that we had better consider it here.

mr. lawyer: i am in perfect accord with what you are aiming at, but it is almost eleven o'clock.

mr. laboringman: i have been waiting patiently to see whether you gentlemen were going to provide in some way for co?perative credit, but up to date, you've not peeped a word.

mr. manufacturer: both of these subjects are really outside of a financial and banking system, the particular thing we set about creating. however, i am perfectly willing to take a night to discuss them, and if we should find that either or both of them should constitute a part of our plan i am ready to adopt them.

mr. banker: all right, i am agreed, and i think we all[pg 247] are agreed that it is not only fair, but advisable, that we take up the whole subject next wednesday night.

uncle sam: do you know, boys, i am really proud of the work you are doing; you've gotten on swimmingly. you have shown such fine moral courage in caving in when you found out that you were wrong instead of playing the part of the jackass that has not intelligence enough to discern when he is in error, and too obstinate to change, if he happens to find out by accident that he is wrong.

mr. manufacturer: uncle sam, i am a democrat, and i look upon that as a personal stab.

uncle sam: just wait a minute, or playing the part of the elephant, that is so turgid, or possibly designedly stupid, or so calm and by self-satisfaction lulled into a conservatism that amounts to reaction, and therefore refuses to move.

mr. merchant: well, i'm a republican, and that looks like a slap at me. however, i guess uncle sam is just in for a housecleaning tonight.

uncle sam: you're both all right, personally, but your organizations have been in wrong until just now there seems to be a patriotic soul-awakening, and it's up to you to redeem them, or there will be a housecleaning, and don't you forget it. i want men; men who have intelligence and conscience; men who are capable and have convictions; men who have moral courage; men who will fight if necessary to have peace; i mean that peace that rules only when right prevails and justice reigns.

good night.