uncle sam: this is the fourteenth night, boys, since we began to meet, and discuss what in a way concerns me far more than any other question except the morals of the people. the tariff you can change, any time, any day, and, as i think should be changed schedule by schedule, so that there would not be any disturbance of business. nor could corrupt trades between the various interests be made, if that policy were pursued. when we take up our money plan we must be sure we are right, before we adopt it. i mean absolutely right; for there is no hope apparently of changing our monetary laws when once they get upon the statute books.

mr. lawyer: that is certainly true, uncle sam, for we've not made a single substantial change in our national bank act since it was passed feb. 23, 1863, almost fifty years ago. of course, we dotted an "i" here and crossed a "t" there, but that is all.

mr. banker: i never thought of that before, but it is literally true. the only change ever made, worth mentioning, in the national bank act was that made in connection with the funding of the national debt in the act of march 14, 1900. then congress adopted word for word a provision contained in congressman fowler's first general financial and banking bill of march, 1897. this provision provided: that the new bonds should be payable in gold coin and bear interest at the rate of 2 per cent per annum and that the banks could issue circulation up to par of the bonds, and that the tax of 1 per cent should be reduced to one-half of 1 per cent. not another change has been made, and this was incidental, rather than the direct purpose of the act.

mr. lawyer: this indifference, or non-interference[pg 341] with monetary laws, is not peculiar to ourselves, however. you find the same is true in england. there has been no change in the english bank act since it was adopted in 1844, although practically all the english banking economists during the past fifty years have agreed that it is most faulty in some respects, particularly in its currency provisions. the same is true of the bank of france which was established in 1803 by napoleon, who proved to be as great an economist as he was a general. the same was true during the first fifty years of our banking legislation. the same will always be true in every country, for nothing is ever done, affecting a financial system, until the situation becomes intolerable as it is in this country today, and as it is fast becoming in germany. of course, the reason is not far to seek; it arises out of the fact that there is a general fear that any change in the banking practices, or system of any country, will disturb the existing business conditions, or arrangements. hence nothing is ever done, as long as the people will put up with it. it takes the terrors and wastes of business misfortune to bring any change however obviously needed; therefore, we must be very patient, and most thorough in our work of preparing a measure for the reformation of our present banking practices which have been correctly described as "archaic," "barbaric" and "the worst in the world."

mr. merchant: that is right, we must be both patient and thorough; and to be thorough i think we ought to know what the situation was in this country in 1860, at the breaking out of the war; because if there is one fact that has impressed me more than any other, it is this, that all the real progress we have made during the past fifty years or since the war, has been either without any law, or in actual defiance of law. under these circumstances i think it is of the utmost importance that we find out if we can what progress, if any, this country had made up to 1860, which was certainly a breaking up point in banking, as well as in all other lines.

[pg 342]

mr. banker: i agree with mr. merchant, and ever since we began these discussions i have taken every opportunity to go back and investigate the banking situation, before 1860, hoping and expecting that our experience then would help us now. i have been literally amazed at what i have discovered in the way of sound banking in many of the states, and i have been profoundly impressed with the fact that then, too, as well as now, all that they had secured that was good was the outgrowth of experience.

mr. manufacturer: i was so greatly impressed with the complete and, as it seemed to me, practically perfect system that had grown up under the suffolk clearing house, which started at boston in 1818, that i have been wondering whether there were not other instances like that which would help us; for, gentlemen, whatever we may think, or want, personally, one thing is certain, and that is this, that we must take things largely as we find them, and legislate as far as possible in harmony with them, bringing the inefficient, the laggard and the "sucker" up to the approved standards of our banking experience and compelling every individual bank to do its part in providing its own insurance by carrying equal and adequate reserves and by carrying on its business in accordance with the highest standards of banking practices today. then we must bring all of the banks of the country under the reign of economic law, and into one harmonious whole for the benefit of all the people. we must protect our gold reserves against the demands of the rest of the commercial world.

now, if any one of you has any information about banking conditions before the war that can possibly be helpful, i hope he will give it to us for our consideration.

mr. banker: i have no hesitation whatever in saying that there were better banking institutions in the united states in 1860 than there are today, so far as the principles are concerned upon which they were operated. but, of course, we must note two things in this connec[pg 343]tion: first, banking generally was not nearly as good upon the average as it is today; nor could you expect it to be. second, banks generally were small, and only in a very few states was banking any more under governmental direction and control than the grocery business, stock buying or horse trading. the result was that sharpers all over the country were using the word "bank" or "banker" to swindle the unwary people and defraud the public generally. third, in some states the legislators were so ignorant of economic law that the laws passed by them only facilitated the schemes of the swindlers in their diabolical work.

it was the reaction against the disastrous and disgusting experiences in one state after another because of the rotten conditions prevailing that some of the states finally passed laws for the establishment of banking systems, which for soundness and efficiency had never been surpassed, nor even equalled for the territory covered and services rendered.

let me cite you a few instances; i will take first louisiana.

the state of louisiana passed a bank act which, though erring in one or two particulars, was nevertheless almost ideal; and under it, the state in 1860 stood fourth in banking capital, and held more specie than any other state except one. no limit was placed upon the amount of credit notes the banks could issue, nor the deposits they could receive and no security was pledged for their redemption. the virtue and real substance of the act was in requiring a coin reserve of 33-1/3 per cent of all liabilities, deposits as well as notes, and confining the loans outside of capital to paper running for ninety days, or less.

not a single bank organized under this law suspended specie payments during the panic of 1857, and all were conforming to the requirements of redemption when general butler marched down the streets of new orleans. the capital of the banks in 1860 amounted to $24,496,000,[pg 344] the $12,115,000, the circulation $11,579,000 and the deposits $19,777,000.

on feb. 24, 1845, the legislature of ohio passed a bank act under which the ohio state bank was organized, with the right to establish branches and to issue credit bank notes. each bank was required to deposit 10 per cent of the amount of its circulation to create a safety fund to redeem the notes of any branch that might fail. in 1846 there were seventeen branches; in 1848 twenty-five branches; in 1849 thirty-eight branches and in 1850 thirty-nine branches.

the note issues were of a purely credit character, and were proportioned to the capital as follows: for the first $100,000 of capital, there might be $200,000 of notes; for the second $100,000 of capital, $150,000 of notes; for the third $100,000 of capital, $125,000 of notes; for the fourth $100,000 of capital, $100,000 of notes, and for each additional $100,000 of capital, $75,000 of notes.

the evident purpose of the act was to give the people a uniform and sound currency, and the plan succeeded admirably. the state bank of ohio was regarded as one of the soundest in the country.

the essence of the act was in the requirement that the notes issued by the respective branches should be redeemed in gold or silver coin, the lawful currency of the united states, and in the insurance given of this result by a reserve equal to 30 per cent, of which at least one-half should be gold or silver and the balance equivalent to gold or silver coin.

john jay knox says: "the banks authorized under the laws of 1845 and 1851 were uniformly successful and furnished a currency for the people, not one dollar of which was ever lost by the holder thereof."

the capital in 1863 was $5,674,000, specie $3,033,000, circulation $9,057,000 and deposits $11,697,000.

mr. merchant: i have often heard my father speak of the state bank of indiana. can you give us the history of that system?

[pg 345]

mr. banker: indiana presents the anomaly of having organized the most admirable system of banking of any state in the union, and also of having had a banking system or banking practices at one time so vicious that under it the banks bankrupted nearly the whole people. the state bank of indiana and its successor, the bank of the state of indiana, stood all the tests of financial panic from 1834 until the banks were all absorbed by the national banking system, without closing their doors for a minute, or losing a dollar to bill holders, depositors or stockholders. it is a proud distinction for indiana that its state bank was long the model bank of the country. so well were its affairs managed that in a period of twenty-two years of actual business, the profit to the state on its $800,000 of stock amounted to three and a half millions of dollars.

the bank of indiana, which became a model, was chartered in 1834, with a capital of $1,600,000, and the state was divided into ten districts, afterwards increased to seventeen, there being a branch of the bank in each.

under its charter the bank could receive deposits, buy and sell gold, silver, bullion and foreign coins, discount commercial paper, and issue bills payable to bearer—a true credit note. a forfeiture of 12? per cent was imposed upon all notes not redeemed in coin.

the institution was hardly under way when the panic of 1837 broke upon the country. the new york banks suspending, compelled the indiana bank to follow in order that it could protect itself. john j. knox says: "no bank in the country stood higher than did the state bank of indiana during the panic. in all the western and southern states its notes commanded a premium, and in the east were taken at a small discount.... its loans were made in small amounts and scattered all over the entire state, thus affording the greatest possible measure of relief."

great as was the success of this splendid institution, the jacksonian democrats, coming into power, at once[pg 346] began an assault upon it, precisely as their leader had laid the axe to the roots of the united states bank.

the indiana democrats failed to destroy the bank of indiana, but succeeded in passing a general banking law permitting banks to be established upon filing with the auditor of the state the bonds, or other evidences of debt, of the federal government, or of any of the states, as security for the notes to be issued.

the state of indiana itself went into the business of issuing notes, and even plank-road companies issued them. the indiana state notes could be had for sixty cents on the dollar and were called "red dog." the plank-road notes and others of similar value were called "blue pup."

the bank of the state of indiana organized in 1855 with twenty branches to take the place of the indiana state bank, maintained the same high standard as its predecessor, going through the panic of 1857 without suspension, although every private bank in the state, except two at indianapolis and one at fort wayne, went down.

like its predecessor, the bank of the state of indiana fell on evil times soon after its organization. the panic of 1837 came two years after the organization of the state bank; and in 1857, before the bank of the state had been in operation quite two years, a great financial panic swept over the country, precipitated by the failure of the ohio life insurance & trust co. every bank in the east, except the chemical bank of new york, suspended specie payment, and all in the west, except the bank of the state of indiana and the bank of kentucky. the indiana bank weathered the storm, and redeemed all its obligations in gold, as fast as they were presented. many of the branches of the bank of kentucky were at remote points from the railroads, and could not be easily reached by the brokers and other bill holders, but those of the bank of the state of indiana were within easy reach and holders rushed for the specie.

[pg 347]

in 1860 the capital was $3,323,000, specie $1,917,000, circulation $5,753,000, deposits $1,186,000.

mr. manufacturer: i can tell you all about the kentucky banks myself—and i want to tell you there were no better then and there are no better anywhere today.

the legislature of kentucky in the session of 1833-4 granted a charter to the bank of kentucky with $5,000,000 of capital and the privilege of six branches. charters were also granted to the northern bank of kentucky, with a capital of $3,000,000, and the bank of louisville, with a capital of $5,000,000, each institution having the power or right to issue credit notes to double the amount of their capital.

while the northern bank of kentucky liquidated in 1898 and the bank of louisville was merged into the southern bank in 1899, the bank of kentucky had in the latter year a capital of $1,645,000 and a surplus of $1,103,000, giving indubitable proof that no one had ever suffered because of its power of note issue. and there the bank of kentucky stands today, occupying the building it purchased from the united states bank, a monument to the sound principles upon which it was founded.

it may be most fittingly observed before passing, that when in may, 1837, the blighting wave of suspension swept from new york across the country, these three banks of kentucky held $1,900,000 in specie against $3,300,000 of notes in circulation—an object lesson for those who may possibly fear that the banks cannot obtain sufficient gold today to protect the notes they are permitted to issue.

the panic of 1857, which was severe in many parts of the country, and which caused great alarm in kentucky, produced no ill effects on the banks, all of them continuing to pay in specie, even after the new york banks had suspended.

in 1860 the capital of these banks was $12,660,000 and the circulation was $13,520,000.

mr. banker: the record made by the kentucky banks[pg 348] was excellent, but for organization the state bank of iowa, like that of the state of indiana, has had no superior anywhere in the world, and humanly speaking, the administration and working of both was practically perfect. iowa in the morning of her statehood was opposed to banking as a business; her first constitution provided that "the general assembly shall provide for the organization of all other corporations except with banking privileges, the creation of which is prohibited."

the constitution also provided, that "the general assembly shall prohibit any person or persons, association, company, or corporation from exercising the privilege of banking or creating paper to circulate as money," the penalty for each offense being one year in the county jail and a fine.

during the intervening years down to 1857, when the new constitution was framed, iowa had suffered so severely from the bond-secured circulation of illinois in particular, known as "wild cat," "red dog" and "yellow dog" money that a provision was incorporated permitting the legislature to create corporations with banking power, subject, however, to a vote of the people, and also to establish a state bank with branches founded on actual specie basis.

i want to call the attention of you fellows to the fact that they had a referendum, a state referendum, in iowa in those days.

it was provided that the branches should be mutually responsible for each other's notes; that the stockholders should be liable for an additional amount equal to their stock; that the bank could issue pure credit notes for double the amount of the paid-up capital; that in case of insolvency the bill holders should have a prior lien over other creditors and that specie redemption must be maintained.

to secure this solvency beyond peradventure, each branch was required to deposit with the state bank either coin, united states stocks or interest-bearing state[pg 349] stocks at their market value in new york, but in no case above par. this deposit was equal to 12? per cent of the note issue, and was known as "the safety fund" to redeem the notes of the branches in case any of them failed to do so. in addition each branch must have on hand an amount of coin, equal to 25 per cent of its notes outstanding and deposits held. here is a replica of the banking system of the bank of the state of indiana, and it contains all of the prerequisites of a well-nigh perfect banking system; and the result proved the soundness of the plan.

this bank was prohibited from paying interest upon deposits. the parent bank was not a bank of issue or of deposit. it transacted no business, except with and for the branches.

certainly there is no bank in the united states today with so good a charter as that of the state bank of iowa.

by an act approved in february, 1862, county treasurers and the state treasurer were authorized to accept the notes of these branches in payment of taxes, and by an act approved march 10, 1864, payment of taxes and the interest and principal on the school fund might be paid in united states treasury notes, national bank notes, or notes of the state bank of iowa, thus showing the unquestionable value of the state bank circulating notes.

when the national banking system was established in 1865, and the 10 per cent tax on circulation was imposed, the life was choked out of one of the most perfect banking systems that had ever existed; and every note of the $1,439,000 outstanding on jan. 2, 1865, was redeemed without the loss of a single cent to the holders.

the capital was $1,048,000; specie, $389,800; circulation, $1,439,000; deposits, $2,851,000.

mr. lawyer: in 1898 i heard an attorney from richmond speak upon the state banks of virginia so boastfully, that out of pure suspicion i investigated them, not believing anything he said at the time.

[pg 350]

about 1800 there sprung into life in virginia a system of state banks based on the old scotch system under which a half dozen banks of issue were authorized, with numerous branch banks in every part of the state. the charter provisions of these banks were the basis of the few laws that have been enacted in relation to banking since that day.

the first of the banks to be established under state control was the bank of virginia, incorporated by the general assembly, jan. 13, 1804, with a capital stock of $1,500,000 in shares of $100 apportioned; three thousand seven hundred and fifty shares to richmond, three thousand to norfolk, two thousand two hundred and fifty to petersburg, one thousand to fredericksburg, five hundred and twenty-five to winchester, four hundred and fifty to staunton and five hundred and twenty-five to lynchburg.

the charter provided that the banks should hold real estate and other effects to the value of $3,500,000, including the capital stock. the cashier was required to give bond for $50,000; the total amount of notes to be put into circulation by the banks, together with the debts, were restricted to $4,500,000, over and above the money actually deposited in the bank; that is, the issue could be three for one on its cash capital, and this was the established rate for this class of banks.

the bank was well managed and was highly successful. its notes, all payable in gold, had a wide circulation and were at only one-fourth of 1 per cent discount in new york.

five other banks were established with the power of establishing branches. these mother banks, six in number, were great institutions, and held the complete confidence of the people. the law did not require that they should keep any reserves and they kept none, except the specie held in their vaults to redeem their notes.

the law provided that the total amount of paper circulation of these banks should never exceed five times the[pg 351] amount of the coin in possession and actually the property of the bank. if the coin of the bank was reduced below one-fifth of its circulation, it was required to stop all discounts until the ratio was restored. as a matter of fact some of the banks issued as high as 8 to 1.

the banks at such times kept their coin reserve up by keeping the discounts down.

the banks of virginia from 1827 to 1860 had a prosperous period, keeping on an average $10,000,000 of notes in circulation without loss.

it is reported that occasionally drafts drawn on new york were placed in the safe to make up a balance, and called "coin." be that as it may, there is no case on record where a bank of circulation and deposit failed, and it is claimed by those acquainted with the banking of that day that no one ever lost a dollar by a virginia bank note previous to the war of 1861, and they were at a discount of only one-quarter of one per cent in new york.

on jan. 31, 1860, the capital was $16,000,000, specie was $2,943,000, circulation was $9,812,000, deposits $7,729,000.

the bank of the state of missouri was started in 1837, with authority to issue notes at the ratio of three to one for the specie in its vaults, and with a branch at each of five considerable towns in different sections of the state; lexington, fayette, palmyra, cape girardeau and springfield. its capital was $3,450,000.

in 1856, when the population of missouri was eight hundred and forty thousand and that of st. louis one hundred and twenty-five thousand, and the indications of substantial prosperity were to be seen in every department of business, the bank circulation was only $2,200,000, although its stock of $1,400,000 specie warranted notes to the amount of $4,200,000, and a considerable part of its circulation was doing duty in california, oregon and new mexico, whither it had been carried by emigrants and traders. it is no wonder that under[pg 352] these circumstances missouri offered an inviting field for the "wild cat" money issued so profusely by banks in other western states and that its people became victims of an inconvertible and unreliably currency, which the bank note reporter quoted at a discount all the way from 5 to 25 per cent.

so valuable were the notes of the banks of the state of missouri in california in the '50's that a gang of counterfeiters took advantage of their popularity, and struck off imitations of them in large quantities.

it was a remedy for this evil, which had become unendurable, and in response to the persistent demands of the important commercial interests of the chief city of the state that the legislature, in 1857, chartered seven banks of issue, with branches conveniently located for the accommodation of business.

these banks were promptly organized in the spring of 1857, immediately after the act authorizing them was passed; for the state was prosperous, and offered a fair field for legitimate investment. the monetary crisis which was impending but not discerned fell upon the country shortly after they had opened for business; but they stood the strain well; two of them, the mechanics and the exchange of st. louis, refused to suspend specie payment, and continued to redeem in coin through the panic; and when the civil war broke upon the country four years later, these two banks again refused to join in the general suspension, and maintained coin payment under all conditions that followed.

the system of banks organized under the act of 1857 rendered the important service of partially displacing the uncertain and variable currency issued by the banks of other states and territories which had found so easy a field in missouri. the legislature had also authorized the old banks in the state to establish additional branches and to issue notes for $5.00, and in a short time every considerable town in the state had a bank, and the notes of missouri banks, issued at the rate of $3.00 to every[pg 353] dollar of specie on hand, afforded a local currency better than that brought in from the outside, which had for years almost monopolized the field. the "wild cat" money nevertheless made a stubborn contest, and the last of it did not disappear until the national bank act went into operation.

in the wild, reckless period, when almost anything in the shape and appearance of an engraved bill, with the name of a bank on it, was good enough to buy public land with, and good enough, therefore, for all other purposes—and in the latter period when other western states authorized banks to issue notes based on various kinds of bonds with the place of redemption out of the way and difficult of access—sometimes in a forest or in a swamp—the legislature of missouri refused to charter institutions to multiply such currency within the limits of the state.

the notes of the bank of the state of missouri were preferred to specie in new mexico, utah and on the pacific coast, and the same high character marked the issues of the system of banks authorized by the general law of 1857.

the capital in 1863 was $11,247,000; specie, $3,666,000; circulation, $4,037,000; deposits, $3,434,000.

everything i have just said i have taken from john jay knox's "history of banking."

during all this varied experience in the west and south, there was a most conspicuous illustration of a complete banking system demonstrating and proving every economic principle that is involved in constructing a financial and banking system for the united states. it was the suffolk system of new england. here were six states, the laws varying in each. portions of these states were far more remote from boston in those days than any part of the united states is from any other part today, so far as business relations and convenience are concerned.

there were no railroads, nor telegraph lines, nor long[pg 354] distance telephones. indeed, almost every essential to anything like a sound banking system as conceived and observed from the standpoint of today was wanting. there was no law requiring a uniform reserve. there was no law requiring coin redemption. there was no law requiring bona fide capital. there was no check upon the amount of notes that might be issued if a bank was dishonestly inclined.

there were, in 1848, three hundred and six banks, deriving their authority from six states, and one hundred and fifty-nine of them did not possess an average capital of $100,000; nor was the average capital outside of boston more than $160,000, and including that city, it was not more than $206,000.

by 1860 there were five hundred and four banks. there are only seven hundred and forty banks today in the same states. can any fair-minded, impartial man deny that the conditions today are vastly in favor of better results than they were then? one law for all; a bona fide capital; a required reserve; a system of redemption established by law; notes furnished by the united states government; a common national supervision. these all unite to compel the admission that any system that could prove its adequacy under such adverse conditions as existed from 1840 to 1860 would certainly approximate perfection today.

nowhere in the whole range of banking experience have so many things, which the student of this subject wants to know, been demonstrated beyond cavil.

to all intents and purposes the possible issues were without limit. the actual circulation in 1840 was only 23 per cent of that permitted. the circulation of 1850 was only 40 per cent of that permitted; and the circulation in 1860 was only 36 per cent of that permitted.

during every year from 1840 to 1860, except one, the note issues were greater (and usually nearly double) than the deposits, illustrating with what certainty and perfect nicety such a system adapted itself to the ever[pg 355] varying needs of the people who were fortunate enough to have it, and how it invariably, with peculiar fitness, met the needs of the rural districts where currency and not checks was especially required.

the states of new hampshire and vermont had bank capital amounting to $8,150,000 in 1850, and notes outstanding amounting to $7,300,000, while boston with $33,200,000 of capital had only $7,500,000 of notes outstanding.

a marvelous exhibition of this interplay and interchange of bank book credits and bank note credits occurred in the six new england states as a result of the panic of 1857. the authorized note issue of the five hundred and ten banks constituting the suffolk system with capital ranging all the way from $25,000 to $500,000 each was $131,000,000. in 1856, the year before the panic, the note issue amounted to $50,000,000, and the deposits amounted to $32,000,000. in 1857, as the result of the panic, the note issue rose to $55,000,000 and the deposits dropped to $25,000,000; in 1858, one year after the panic, the note issue had fallen to $36,000,000, and the deposits had risen to $47,000,000, or there had been a conversion of $20,000,000 of bank note debts into deposit debts. the exigency for cash had disappeared and the depression had come.

do not fail to observe three important facts in this connection:

first: that although the banks were authorized to issue $131,000,000, they never exceeded $57,000,000, which was the highest point of circulation, and that was reached as the result of the panic of 1857, and that they averaged $43,000,000 from 1840 to 1860.

second: that there was a perfect adaptation of the deposits and note issues to the peculiar and ever changing demands of the people during the panic, and during the depression in trade that followed the panic.

third: that the number of banks in new england in 1856, the year before the panic, was four hundred and[pg 356] ninety-five, and in the year 1858, the year after the panic, there were four hundred and ninety-nine banks, or four more banks the year after the panic than there were the year preceding the panic, an unquestionable tribute to the principle of current coin redemption.

now, mark this, that the very heart and the very soul of the suffolk system was in the fact that the notes were redeemed in boston in coin. so good were these notes considered to be throughout the entire west, that at buffalo, chicago, milwaukee and all commercial points in the then far west, they were always taken at a premium of from 1 to 5 per cent. it was not the size of the bank of issue that made them good and desirable, but the fact that they were redeemed in coin in boston.

when the soundness of this system is tested by a comparison with that of the national banks, the result more than justifies the assertion that the suffolk bank system of new england was incomparably better than the national bank system; for, when the conditions during the twenty years from 1840 to 1860 are compared with those of the past thirty years, all must admit that argument is futile and the conclusion is inevitable.

mark this, that while a tax of one-eighth of 1 per cent of all the notes in circulation would have paid all the notes of the banks that failed under the suffolk system from 1840 to 1860, it would have taken a tax of one-fifth of 1 per cent on all the notes outstanding issued by the national banks to pay the notes of the failed national banks.

in confirmation of what i have said in praise of the suffolk system let the bank commissioners of connecticut, vermont, maine, massachusetts and the new york courier and enquirer testify.

"the currency of this state is of the first order and can not be improved, being equal to gold and silver. this is strong language, we admit, yet perfectly true, for every bill holder can on demand convert his bills[pg 357] into coin." (connecticut bank commissioners' report, 1841.)

"the bills of any country bank, redeemed at par in any commercial city, will always be current throughout the extent of region whose business channels flow to that city. hence, new england money is worth more in the cities of new york and philadelphia than the bills of their own country banks. vermont bills have uniformly borne a premium in the eastern cities without loss, while bills of their own states are at a heavy discount." (vermont bank commission's report, 1852.)

"the 'suffolk system,' though not recognized in our banking law, has proved to be the great safeguard to the public. whatever objections may exist to this 'system' in theory, its practical operation is to keep the circulation of our banks within the bounds of safety. no sound bank can have any well-founded reason for refusing to redeem its bills in boston, and a bank that is not sound can not long do business under that system and ceases to be in good credit when it is 'thrown out at the suffolk.'" (maine commissioners' report, dec. 31, 1857.)

"if there was no check upon circulation there might be some danger, but the frequent redemptions at the suffolk bank and the rapid communications between different parts of the country will prevent any greater circulation than the natural business wants of the country will sustain.... indeed, this system of par redemption seems to be a most perfect regulator upon all the new england banks. it would seem somewhat surprising that something has not been adopted in other parts of the country that should produce the same beneficial results." (connecticut bank commissioners' report, 1848.)

"the charters of the banks have been renewed. if the laws by which they are constituted the agents of the people to provide a currency, and by which their faithfulness in the discharge of such agency is secured, re[pg 358]main unchanged, there is every reason to believe that the currency of massachusetts will be for the next twenty years what it has been for the twenty years past—as perfect as any in existence, as perfect as in the nature of things it can be. no reasonable man, no practical man, no man who is not bound hand and foot in the fetters of mere theory, can desire for the people a currency better adapted to meet all the circumstances of a business community than that which has been furnished by the banks of massachusetts for the last quarter of a century." (james b. congdon, cashier merchants' bank, new bedford, in memorial to governor of massachusetts, 1851.)

"we said that the massachusetts currency was apparently unsecured. in reality their bank paper is well secured. the experience of the last fifteen years has demonstrated that the losses from bank issues in the state of new york are four or five times greater than in massachusetts. the system of the latter is better than our own." (new york courier and enquirer, 1854.)

"it is by no means wonderful that a system which has stood the test of time and struck its roots so deep as to have become incorporated with and formed a part of our banking system should be abandoned with hesitation for one which is new and untried." (maine bank commissioners' report, 1865.)

"the state parts with these objects of her care and solicitude with many regrets, but with a just pride in their career, inspired by the belief that their capital has been highly instrumental in promoting the prosperity of the state, and that they have furnished as good a paper currency, based on individual credit, as any part of the country has ever enjoyed." (massachusetts banking report, 1865.)

mr. lawyer: if, as we have gradually come to understand and firmly believe, the true service of a bank is to furnish credit to its customers, as they want it, and[pg 359] in such form as they need it, then these institutions which you have been describing were certainly far better suited to the purposes of their day than any banks we now have in existence.

two things seem to have been present in all of these various institutions: ample coin reserves, which ranged from 20 to 33 per cent, to meet any demand for credit redemption and perfect freedom in changing bank credits from the form of book credit to the form of note credit, and the form of note credit to the form of book credit, according to the desires and needs of the customers of those banks.

as a result of interchangeability of book and note credits, a bank could always protect its coin reserve, for if the customer was just as well satisfied to take the bank's notes, instead of coin, or its reserves, it must be apparent to all of you that the cost to the bank would only be from one-sixth to one-fourth as great, and that the bank would have several times as much credit to loan, and at the same time be in a much stronger position.

let me illustrate what i mean by calling your attention to what happens over in new york every fall. let us suppose that the new york banks owe the country banks, say $500,000,000 and that the country banks call for it from july to january for the purpose of moving the crops. the banks of new york with the right kind of a currency system would not need to disturb the situation in new york at all because they could send their correspondents their credit notes, or cashier's checks, for $500,000,000. you see the new york banks would simply convert a deposit credit subject to check or draft into a note credit. the amount of the debt would remain the same, the amount of the reserves would remain exactly the same; but, instead of the country banks continuing to keep the deposits subject to check at the banks, they would take the notes which would serve their purpose, because they could in turn send the notes into the corn and cotton fields, to help harvest and gather the[pg 360] crop; and, just as soon as the notes had served their purpose, they would be returned to the country banks and by them in turn sent on to the new york banks, and would have been reconverted into book credits. not a single dollar of actual money would have been used in the whole transaction, and yet the country would have been served just as well, as though every bank note sent out had been a gold certificate.

on the other hand, if the new york banks should continue to be as they are today compelled to ship the $500,000,000, they would have to call loans and shift conditions until they could scrape up $500,000,000 with as little injury as possible to their customers and send it west; nearly every dollar so sent out is reserve money of some form, gold certificates, silver certificates and united states notes. now mark this, the credit notes cost the bank only the interest on the reserves behind the notes; but when the banks ship out their reserves, the cost must necessarily be four or five times as much, to say nothing of the injury they have done to the business conditions in new york. and so this same principle runs on throughout all of our banking business today from one end of the country to the other.

mr. merchant: well, mr. lawyer, your entire argument goes to demonstrate with mathematical certainty that the country banks would never have any occasion whatever to send to new york for currency, as they would create their own currency by converting bank book credits into bank note credits to meet all ordinary demands, a fact that not only accentuates, but proves more conclusively what you are saying, and reinforces your argument.

should we be fortunate enough to secure a right kind of banking system in this respect, we could almost double our bank reserves, that is, make them twice as large, and yet make two or three times as much profit on that part of the banking business, growing out of the substitution of credit notes for reserves, and at the same time be[pg 361] vastly better able to protect the balance of our business from disturbance due to the fact that we are compelled to use reserve money for currency purposes. this now seems to me a very simple matter when you once have grasped it.

mr. banker: in this connection i want to call your attention to this fact, and i want to note that it is a very important fact which was so obvious in connection with every single statement of capital, specie, circulation and deposit, that has been given, when referring to the banking systems before the war, and that's this: that the note issues did not begin to average one-half the authorized amounts, proving conclusively that the currency of these banks invariably adapted itself to the exact needs of the people.

notes outstanding. possible issue was. per cent of possible issue. specie held. deposits.

louisiana

$11,579,000 no limit except 33% coin reserve $12,115,000 $19,777,000

ohio

$9,057,000 $10,000,000 about par $9,057,000 $11,697,000

indiana

$5,753,000 no limit but 12?% penalty for failure to redeem in coin $1,917,000 $1,186,000

iowa

$1,439,000 $2,096,000 70% $389,800 $2,851,000

virginia

$9,821,000 $14,725,000 70% $2,943,000 $7,729,000

missouri

$4,037,000 $10,998,000 38% $3,666,000 $3,434,000

suffolk system

$44,000,000 $131,000,000 30% $10,058,995 $41,208,000

[pg 362]

can anyone doubt, after noting these figures, that the note issues of the various banking systems kept as perfect pace with the requirements of trade, as checks and drafts do? certainly it is perfectly evident that the bank notes came and went precisely as all bank credit should.

mr. lawyer: while all these splendid banking systems were snuffed out by the 10 per cent tax upon circulation, the sound principles upon which they were all founded are still most successfully exemplified by the canadian banking system which you will remember took its charter from the statutes of massachusetts.

there are today 27 banks in canada, with 2,000 branches. the general principle of the canadian banking system is identical with that of the virginia, kentucky, louisiana, indiana, ohio, iowa and missouri banks. it is true there are some differences in matters of detail. the amount of notes that can be issued regularly is that of the capital of the bank. the notes are a first lien upon the assets of the bank, including a double liability of the stockholders; the bank notes are also secured by a guarantee fund of 5 per cent, which is contributed by the banks issuing the notes; there is a provision that the notes shall bear interest at the rate of 5 per cent until notification of redemption. no holder of a canadian bank note has ever lost a cent since these provisions have been in force.

you remember that we have a chart which shows very graphically with what marvelous accuracy, year in and year out, month in and month out, day in and day out, the canadian bank note currency meets the actual requirements of trade; no more, no less, but always just adequate.

the precision with which the currency rises and falls with the demands of trade is the result of the daily redemption of all bank notes, concurrently with the checks and drafts, through the clearing houses, or over the counters of the banks, or at the points fixed by law[pg 363] for note redemption for the purpose of keeping the notes at par, all over canada.

we want to keep this diagram here on file, because it speaks louder than words possibly can.

mr. banker: one striking characteristic of the bank of the state of indiana and the state bank of iowa was that the parent, or home institution, did no business at all, except for the branches, and examined and supervised them. hugh mcculloch, the president of the bank of the state of indiana, said, "that the soundness of the bank was due to the frequent examinations."

another feature to be found in both these systems, and so far as i know peculiar to them, was this: that all the branches were responsible for the failure of any one of them; but the branches did not share in each other's profits. the result of this law was to make every branch the watch dog of every other branch; there was only one instance in which the home, or parent institution, took charge of a branch in either state, and that was in 1860. the executive committee of the state bank of iowa having heard that one of the branches had made some unsafe investments, "promptly took charge of its affairs, and authorized a reorganization, calling upon other branches for such aid as was required, which was given so that the branch, with no delay, and without loss of a cent to its customers, or note holders, or suspension even of its legal business, was again put on a firm and solvent basis."

undoubtedly this plan of supervision by the parent, or home institution, which did no business, was a wise precaution. mark this, it is precisely the same principle put into operation that is now being followed by twenty of our clearing houses, and was then, and as i believe it will prove now, a practical guarantee of all the liabilities of all the banks that are subject to such examinations and supervision.

the most significant fact, and the one to be noted particularly, is that the parent, or home institution, like the[pg 364] clearing house, only acted for the branches, precisely as the clearing house acts for its members, and examined and supervised them. economically this principle is absolutely sound. historically, it is of essential importance because here history is repeating itself, after a lapse of fifty years, and in both instances this protective principle and practice has grown out of precisely the same conditions—the unsound and dangerous methods of certain members of the banking fraternity itself.

mr. merchant: gentlemen, the astounding thing to me is that when this country had once learned and practiced so sound, complete and perfect a banking system, it should have lost it.

mr. manufacturer: i don't think that that is at all strange when you remember that it only existed in a few states and consider just how we lost it. you will remember that the virginia banks which were founded upon the old scotch system started in 1804, and worked perfectly until the war broke out. the other banks, or systems of banks, were established from time to time, some of them as late as 1857, and as mr. banker remarked several nights ago, modeled very largely after the two united states banks, the charter of the last of which expired only in 1837.

from a close study one can discover both of these two systems combined in some instances. in this way we were gradually working out a national system precisely as we are today under new and vastly more varied conditions, but the war coming on, destroyed all that had been done.

you will remember that secretary chase, desiring to sell government bonds for the purpose of carrying on the war, secured legislation which put a tax of 10 per cent upon all bank note issues and compelled banks desiring to issue currency to buy government bonds as a basis of their circulation. as a result, he produced a currency of uniform appearance that was of equal value every[pg 365]where and a great blessing to the country. this condition was a very great and most agreeable change in the currency experience of the country, because there had been practically no legislation except in a few states that in any way controlled banking practices, or currency issues. the result was that we had "blue pup money," "red dog money," "wild cat money," "yellow dog money" and every other kind of "dog gone money," that could be gotten up with paint and paper to fool and defraud the people. on top of this situation there arose a terrific political prejudice engendered through political controversy toward a central bank. the conditions brought about by the legislation, secured by chase, have kept up the present régime until it has become so utterly intolerable, because utterly unsound economically, and so disturbing to the general welfare as to compel immediate consideration and reconstruction.

it is really the first time since the civil war that the finances and banking of the country have become a serious question outside of the acute phases presented in the government issues, or the greenback craze of 1875 and the silver hallucination of 1896. today, the question is not a specific one, or a mere detail, but one of fundamental principles and of a most comprehensive character. it involves the whole subject of governmental finance and banking and it is well that it should; for our business is so vast now, almost 50 per cent of the banking power of the world being within our borders. our annual productions are approximately thirty-five billions. our annual clearings will pass the fabulous mark of $170,000,000,000 (one hundred and seventy billions). so that every recurring financial disaster will be worse, if possible, than the one going before it.

mr. banker: right you are, mr. manufacturer, and this is true because the principles involved are as fundamental and immutable as the law of gravitation; and if we persist in our folly, when dealing with these enormous[pg 366] volumes of credit, the destruction that is sure to follow will be on a scale with that of worlds in collision.

mr. merchant: that seems to describe the situation somewhat graphically and impressively, but i must say truthfully. we are undoubtedly "up against it" as the boys say. only the other day i was talking with a president of one of the largest national banks in the country, and he told me that unless something was done very soon, he would get out of the business, because he could not stand the strain; but the bankers' troubles are no worse than those of every business man, and it seems to me as though we were on a perpetual strain, and living in a sort of terror of what may happen at almost any time. the business atmosphere is unnatural. certainly this cannot be necessary.

mr. laboringman: well, i don't see anything very strange or unnatural about this thing, if it is as you have already stated that there have been no changes in your banking laws worth speaking of, since 1863. look at your railroad development. fifty years ago the locomotive that weighed thirty-five tons was a whopper, but now they turn them out weighing one hundred and thirty-five tons. we used to have thirty-five and fifty-pound rails, and our ties forty inches apart. now we have a hundred-pound rail, yes, one-hundred-and-fifteen-pound rail, with the ties twenty-five inches apart. the other day, i counted one hundred cars with one hundred thousand pounds capacity each, every one loaded full in a single train. now, what would you think of running a hundred-ton engine, and that kind of a train of cars over a railroad built fifty years ago? ties only eight inches thick and forty inches apart, on a corresponding road-bed. why, men, i can tell you we don't want a single-track railroad of that character now, with a switch out every ten miles to let trains pass; but we want a four-track road, with twelve to fifteen-inch ties, only twenty-five inches apart, and equipped with signal and block[pg 367] systems of the latest type, and most perfect automatic operation.

uncle sam: gentlemen, when it comes to getting down to brass tacks, and hitting the thing plump square between the eyes, mr. laboringman gets away with all of you. now, can you beat that as an illustration of our financial and banking needs? if you will construct a banking system up-to-date, and just add to these domestic requirements the necessary provisions growing out of the fact that i am now a world power, i should have said, i am the world power, and prepare an international financial and banking system, we shall meet the demands of this new century; but otherwise i shall find myself wholly incapable of protecting the very foundation of commercial credit, my gold reserves, when the test comes.

mr. banker: mr. laboringman and uncle sam have laid down the right kind of a program in telling terms, if not explicit. it is clearly up to us to work out a plan as comprehensive and perfectly adapted to our needs today, as were the banking systems of louisiana, ohio, indiana, kentucky, virginia, iowa, missouri and the suffolk banking system of new england was to the needs of those various sections of the united states at that time; for they were practically perfect from the standpoint of economic principles and the needs of those times. the principles upon which they were founded are eternal and are just as applicable today as they were then. the principles have not changed, although the conditions have, and that most amazingly.