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money, and this lawful money then becomes available as a reserve of the banks for the payment of their liabilities. If, by keeping all lawful money which they receive, and by paying out only bank notes, the banks can issue and keep in circulation, say, two hundred million dollars of their notes, these notes would take the place of a like amount of lawful money in circulation, and the two hundred million dollars of lawful money thus displaced by notes would go to increase the reserves held by the banks. Such an increase of the bank reserves by two hundred million dollars would bring about an increase of the power of the banks to create deposit liabilities and to make loans by about six times two hundred million dollars, if you take the average of the national banks, or about twelve times two hundred million dollars, if you take the average of all the banks and trust companies in the United States. You can readily perceive, therefore, that the issue of bank notes is a tremendous power for the expansion of bank credits—such expansion being effected not by increasing the ratio of bank liabilities to bank reserves, but by substituting promissory notes of the banks for lawful money as a circulating medium, and by driving lawful money out of circulation into the reserves. Every dollar of bank notes in circulation means a dollar of lawful money saved for the bank reserves, or added to them, and more than six times that amount added to the power of the banks to grant credits, without reducing the ratio of reserves to liabilities.

There is no country in the world in which bank credits, in relation to the reserves held by the banks, are expanded as far as in the United States. The reserves in gold held by the Bank of England against its deposit liabilities rarely are less than 40 per cent. of these liabilities and usually they are much larger. To-day the reserves of the Bank of England amount to 50 per cent, of the deposit liabilities of the bank. It is difficult to ascertain the exact reserves of all the banks in England, but it is estimated that their aggregate reserves in gold amount to more than six per cent. of their aggregate deposit liabilities, which is a larger percentage of gold than is held by all the banks and trust companies in the United States. The reserves held by the Bank of France commonly amount to between 70 and 80 per cent. of all the notes and deposit liabilities of the bank, more than two-thirds of these reserves being gold, and the remainder silver. The Imperial Bank of Germany commonly holds reserves equal to about 40 per cent. of all its outstanding notes and its deposit liabilities, and it is compelled by law at all times and under all circumstances to hold in its reserves an amount of coin equal to at least 3343 per cent. of all its outstanding notes.

The combined banks and trust companies of the United States commonly hold about 4 per cent of their combined deposit liabilities in gold, and about 8 per cent. in currency of all kinds, including silver, greenbacks and bank notes. Even these small reserves are created in large part artificially, by driving lawful money out of circulation and into the bank reserves by means of an enormous volume of National bank notes always kept in circulation. The report of the Comptroller of the Currency shows that the volume of uncovered paper currency in the United States -I mean bank notes against which money is not held as a reserve -is to-day about three times as large as the uncovered paper currency of any other country in the world, and that the uncovered paper currency per capita in the United States is twice as large as in any other country in the world. The precise figures on January 1, 1906, were as follows: Germany, $213,900,000; France, $118,200,000; United Kingdom, $116,600,000; United States, $582,100,000; the per capita uncovered paper currency being: Germany, $3.53; France, $3.02; United Kingdom, $2.67; United States, $6.83. The above figures for the United States do not include our six hundred million dollars of silver, which for practical purposes is uncovered currency that must be kept at a parity with gold.

Let us not shut our eyes to the fact that the true cause of our financial troubles is the over-expansion—the inflation—of bank credits beyond the limit of safety, and that this over-expansion or inflation has been caused by the issue of an excessive amount of promissory notes of the banks for use as currency in place of real money. Nothing will correct this situation or prevent a recurrence of our financial difficulties except a reduction of the volume of bank notes outstanding in normal times. In our finances, we are in the position of a person who habitually lives on stimulants. The more whisky such a person drinks the more does he want, and the more does he need to keep himself up; but you cannot cure such a case by administering more stimulants. You may temporarily brace up the patient and postpone complete collapse by a further dose of whisky, but this would only make the con

dition of the patient more serious in the end. Yet that would be the effect of nearly all of the currency plans that have been proposed. None of these plans provides for any check or restriction upon the existing over-expansion of our uncovered bank note currency and of bank credits. None of these plans strikes at the cause of our present troubles or would tend to prevent a recurrence of these troubles. These plans are merely designed to palliate the evil effects of over-expansion by authorizing additional expansion in times of trouble. The effect in each case would be to loosen still further the inadequate checks upon overexpansion that now exist, and the ultimate result in each case would be to make the situation more dangerous than before.

One plan is that the banks shall be authorized, in case of emergency, to issue an additional amount of bank notes for use as currency, upon payment of a high tax to the Government; this high tax being designed to prevent the banks from issuing their notes, except when there is a severe money stringency and rates of interest are very high. This is the plan embodied in the Aldrich bill, and it is claimed, in support of this plan, that it follows the precedent of a similar plan that has worked with marked success in Germany—the Imperial Bank of Germany being allowed to issue its notes without limit, upon payment of a tax at the rate of 5 per cent. per annum to the Government. Nothing could be further from the facts than that this would be following a precedent set by Germany. If we should follow the German system, we should indeed have sounder financial conditions in the United States than we have to-day; but the merit of the German system lies in the adherence to sound banking methods, and not in the issue of bank notes upon payment of a 5 per cent. tax to the Government. The Imperial Bank of Germany, which is a great central bank, controlled by the Government, watches and guards financial conditions throughout Germany; and it carefully keeps the expansion of bank credits within the limits of safety. It commonly holds reserves amounting to 40 per cent. of its aggregate deposit liabilities and note issues. The note issues of the German banks, even in times of money stringency, do not exceed onethird of the notes which the National banks of the United States have outstanding at all times, and per capita of population, they do not exceed one-half the note issues outstanding in the United States. Furthermore, the Imperial Bank of Germany can never issue notes in excess of three times the amount of coin which it holds in its reserve.

The Aldrich bill contains nothing to prevent the overexpansion of bank note currency and of bank credits, which has caused our financial disasters in the past. Its only object is to authorize further expansion in times of stringency. It would merely encourage the banks to expand still further their credits in normal times, relying upon the power of issuing circulation when the penalties of over-expansion are threatening them,

The Fowler bill is designed to substitute what are called asset bank notes for our present bond-secured National bank notes; but here again there is no provision to prevent the over-expansion of bank note issues and of bank credits, which are the cause of our trouble. On the contrary, the effect of this bill would be to make such over-expansion easier than before.

Under the Fowler plan, the banks would be empowered to issue a practically unlimited amount of their notes for use as currency, upon payment of a tax at the rate of 2 per cent. per annum. The actual issue of the notes would be limited only by the demand for currency as a circulating medium and by the presentation of the notes to the banks for redemption in lawful money. We know from our experience with the present National bank notes that the banks would put out all the notes they can, and that the notes would be presented for redemption only by banks that have received them from depositors and that desire to obtain lawful money good as reserves in exchange for the notes. The Fowler plan would probably result in substituting bank notes for the greater part of the lawful money now in actual ciculation and in adding this lawful money to the bank reserves. In this way the reserves of the banks and their power to grant credits in the form of deposit liabilities and to make loans would be enormously increased. The consequence would be a vast expansion of bank credits as soon as the spirit of speculation revives throughout the country, and large exports of gold until the reserves of the banks have adjusted themselves to the prevailing demand for credits. The ultimate result would be to make the financial condition of the whole country more insecure than it has ever been. The Fowler plan contains other features, all tending to cause inflation of bank credits. It likewise provides for the guaranty of bank deposits by a common fund to be contributed by the banks; but I am unable, for want of time, to discuss this important feature of the plan.

Then there is the plan to have the Government guarantee the deposit liabilities of the banks. I have pointed out to you that 90 per cent. of the so-called deposit liabilities of the banks are not deposits at all, but merely represent exchanges of credits made by the banks for a profit. They are utterly different from the deposits made in a savings bank. I hardly think that such business transactions are of such specially meritorious character as to warrant lending the credit of the United States for their support. The effect of a Government guarantee of bank deposits would inevitably be to encourage looser banking methods, because people could then do business and swap credits with a speculative, improvident, and badly managed bank as safely as with a sound and conservative bank of many years' standing. Under this plan, if the United States should guarantee the deposits of the National banks alone, it would assume a liability amounting to five thousand millions of dollars, or about five times the whole National debt. If the Government should guarantee the State banks and trust companies, also, or practically force them to become National banks, the Government would guarantee the payment of about twelve thousand millions of dollars. guarantee would not accomplish the desired result unless the Government should be prepared to pay instantly in cash the deposits of any bank which fails. Unless the Government should keep on hand at all times hundreds of millions of dollars in gold, as a reserve to pay depositors in times of panic, the whole plan of a Government guarantee of bank deposits would be ineffective, and would be little more than a gigantic bluff.

It has been urged in Congress that the Government alone should issue notes for use as currency, on the ground that the issue of notes to be used as currency, like the coinage of the precious metals, is a governmental function that should be delegated to the banks. The answer to this proposal is that the issue of the promissory notes of the Government in order to supply and regulate the currency has never been considered a governmental function by any nation in times of prosperity, or in normal times; that the issue of Government notes has never been resorted to by any nation, except in times of stress, when the National credit was low, and that it has invariably proved a source of trouble and

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