As a matter of fact, we have a central bank at the present time, in all its essential features:  all it needs is modernizing, vitalizing, humanizing.

Why not be honest with ourselves and recognize that we have practically at the present time a central bank and proceed to set the same in order ?  A centralized banking power, a fiscal power, is inevitable in every nation, whether it be little Switzerland, up in the mountains, or the greatest commercial nation in the world;  it is inevitable because it is logical, natural, and in accordance with economic law.

Congress can not regulate the money power and money influence of this country by decentralizing it.  A central controlling influence is as essential to a proper monetary and currency system as a central heartbeat is to the physical system.  It can only be done by taking it under the control of Congress and the Government.  Can you think of any evils charged against a central bank which are not alleged to exist at the present time in the extreme ?

The concentration of business in large units, which has been going on all over the world ---not alone in this country--- has called for corresponding increase in the size of financial units.  It is "big business" that creates big banks.  Banks are a barometer as well as a helpmeet.  Is it not fair to assume that if we had a United States bank, exercising powers which similar institutions exercise in other countries, many of the alleged evils of the present financial methods would have been avoided ?  Have not banks, through the imperfections of the law of Congress, been constrained through clearing-house associations, syndicates, and otherwise, to meet business conditions and demands ?

The failure to have a central bank has prevented none of the dreaded conditions.  Is it not time that we had the power of a central bank to prevent, as far as may be, undesirable conditions and to ameliorate and control what can not be prevented ?

We have all of the conditions existing to-day against which Andrew Jackson made war in his time, and alleged to be existing in an exaggerated form.

Conspicuous among the many imperfections in our monetary system are three cardinal defects:

(1) The want of elasticity in our currency.

(2) The want of a market for credit.

(3) Competitive rather than cooperative management of reserves.

It seems to me that any legislation which you may devise, in order to be effective, must deal with and remedy these defects.

Our present bank currency is secured by Government bonds, and in order to lessen the burden of carrying these high-priced bonds the currency is carried at the maximum, practically all the time.  Currency, in order to be elastic, must contract as well as expand;  but this currency, no matter how low the rates of interest, is continually forced into the channels of trade or speculation. This currency is a tax upon rather than a help to the resources of a bank, since a bank must pay a premium for the bonds at the present time and can only get par in bank notes.  This currency furnishes a market for Government bonds at a fictitious valuation, but it serves no other good purpose, conceding even that purpose to be a good one.

Commercial banks are created to aid commerce and conserve the interests of the people.  Their investments should be limited in the main to presently maturing obligations for the payment of money.  Well diversified promissory notes of acceptances, for the payment of which people are working and planning, in order to protect their credit and preserve their financial lives, are the best and most liquid assets that banks do or could possess.  It is upon such assets that bank notes should be predicated, rather than compel banks to go outside their business and buy bonds for such a purpose.

Currency based upon commercial assets would naturally expand with business activity and contract with the lessened demand.

There should be a market for credit, a government-controlled institution, where any bank can go and within reason discount its goods receivable and receive the proceeds in currency, if need be, in order to satisfy the demands of its currency.

Currency reform is closely connected with and naturally brings us to the second cardinal defect in our system--- the entire want of a credit market.  There should be some power, somewhere, available for the discount of commercial obligations, the proceeds of which could be utilized in the form of currency, if desired.  The only source of immediately available funds which we have in this country is the call-loan market of the New York Stock Exchange.  These loans are of the most cold-blooded character, and brokers expect them to be called whenever the lenders of the funds need the same.  In the commercial nations of Europe they have no such call-money market as obtains in New York, but they have a credit market, where drafts, or obligations of commercial houses and business firms, accepted by their bankers, have a ready, daily market, and bankers buy or sell acceptances for the sake of interest overnight, in accordance with the financial condition of their institutions.

There should be some place, provided by law, where a bank in good condition, under good management, and with abundant good assets, representing the best credit of the country, could go, discount such portion of their assets as might be necessary, and receive currency therefor, in order to supply the needs of their customers.  That is the second cardinal defect of existing law, and the remedy which we should have.

A third very serious defect in our present banking system is the method of handling the reserves, which the national bank act, and many State laws as well, require banks to keep for the protection of their depositors.

The reserve power of our banking system should be available, in the important money centers, not one center but several.  It would take several days to ship money from New York to San Francisco.  There ought to be reservoirs of reserve in the important points of the country, but under a general altruistic control ---by that I mean Government influence--- a control in the interest of all the people, so that these funds could be used where pressure was greatest, and when one locality was served could be available in any other locality.  There should be an elastic currency, predicated upon the commercial assets of a bank, and which may increase in volume as the commercial assets of the banks increase, in response to various demands, and then, having served its purpose, would contract, disappear, retire from circulation until again needed.

Ninety per cent of the business of the country is consummated by means of checks and drafts, and these respond perfectly to the growing or lessening demands of business.  The main trouble is that when, because of extreme business activity, the currency supply is over-taxed, or because of distrust or fear on the part of the people, currency may be hoarded and the supply thereby reduced, there is no means of relief provided by our law, or was not, prior to the enactment of the very cumbersome legislation known as the Aldrich-Vreeland Act.  Banks were constrained to import gold from abroad at large expense, or, through their associations, to issue clearing-house certificates, but there was no means provided by law to meet such a contingency, and there is no adequate means now.

The Aldrich bill remedies these three defects in a perfectly practical, and I believe efficacious, manner.  It provides for a central reserve association, to be owned exclusively by banks, and with its business limited to banks.  Conservative and altruistic management is sought to be assured by limiting dividends to 5 per cent ---excess earning going to surplus and into the United States Treasury.

If desired, I see no reason why the United States should not be a stockholder in any central bank, owning 51 per cent if need be.

Mr. Morawetz.  And the result is that if you issue bank notes and fail either to draw them in or to contract the currency again when the need for the bank notes has passed, it means increased bank reserves, increased credit power of the banks, lower interest rates, and either expansion of bank credits or shipments of gold to Europe.

It has sometimes been argued that all you need in order to have a sound system of bank-note issues is to provide that the banks shall keep adequate reserves for the notes which they issue, and that the notes shall be made readily redeemable in different parts of the country for the convenience of those holders.  That, I believe, to be a far-reaching error.  Bank notes have no elasticity in the sense that a rubber band has elasticity.  A rubber band has to be pulled out and it contracts by its own elasticity.  Bank-note issues have no inherent elasticity, except that of expansion ---I should say, of diffusion.  They never contract unless a contraction is forced by the issuing banks ---by the voluntary action of the issuing banks.

Mr. Korbly.  Let me suggest to you that it is my opinion that a bank would have considerable difficulty in putting its notes out and keeping them out.  It need not bother at all about how it is going to get them back.  That is, my view of it is that the trouble would be to keep them out.

Mr. Morawetz.  I think you are mistaken, and I will show you by reference to experience and by reference to reason why that is a mistaken view.  A bank note is a promissory obligation bearing no interest, and it is profitable to the banks to pay their debts by issuing their promissory notes without interest.  Therefore the banks always are glad to put out their notes.  If the banks have the power to issue notes without feeling a responsibility for the credit situation in general, if they are looking only to their own individual profits, they will put out all the notes they can.  Now, the public holding notes never present notes for redemption.

Mr. Korbly.  Why, Mr. Morawetz, would not a man in the course of business, having accumulated in his day's business bank notes, take them down to his bank and deposit them just as he to-day deposits checks and cash;  and would not that retire them ?

Mr. Morawetz.  I am coming to that.  As long as bank notes are kept at a parity with gold, as of course they must be in order to be of any use whatever, it is utterly indifferent to the public whether they have bank notes or gold or greenbacks in their pockets.  If they have surplus cash, have more money than they want to carry, they deposit the surplus in their own banks without regard to whether the currency they deposit consists of gold or greenbacks or national-bank notes.  In fact, the general tendency is to deposit the gold first, because it is inconvenient to carry.  When there is a surplus of currency in actual circulation among the people, this surplus is deposited indiscriminately, without considering what kind of currency it consists of.  But the banks immediately sift that currency, and they hold onto the lawful money, or to that which is available as bank reserves, and whenever anybody wants cash they pay out the notes again.  It is by this process that we have over $700,000,000 of national-bank notes outstanding year in and year out.

Mr. Korbly. The fault lies, then, as I said awhile ago, in the redundancy of the currency.  There is no contraction.  If the merchants who receive them should deposit to-day in Washington City the notes of banks in New York, Philadelphia, Chicago, and Cincinnati, and the Washington banks would send those notes back to the banks on which they were drawn, just as they send their checks and drafts, right alone in the same packages, would there not be an automatic contraction ?

Mr. Morawetz.  No. sir.

Mr. Korbly.  I would like to have you explain to me why not.

Mr. Morawetz.  Why not ?  As I pointed out a moment ago, the individual never presents bank notes for redemption, but he deposits his currency, without regard to its character, in his own bank.  His own bank then, when there is sufficient demand to make it worthwhile to do so, will send on national-bank notes of other banks for redemption by these banks in lawful money.  The bank which issued the national-bank note takes its note and sends currency to the bank which presented the note.  The effect of that is not to restore one dollar of the lawful money to circulation among the people;  it merely transfers the lawful money from one national bank to another national bank.

Mr. Taylor.  From one locality to another ?

Mr. Morawetz.  From one locality to another;  and the bank, whenever anybody asks for currency, immediately pays out the notes again.  The actual effect, as we nave known for more than 20 years, has been to keep the maximum amount of the national-bank notes outstanding in the hands of the public without any consideration of the amount actually needed.

Mr. Korbly.  You are arguing it from the present law and I am arguing it from the natural law.

Mr. Morawetz.  Take it under any system.  In Canada they have 30 banks with numerous branches throughout the country, and those banks act as an association which supervises their note issues and redemption.  They act in concert.  They issue notes freely, and what has been the result ?  The only currency in circulation among the people in Canada consists of bank notes, fractional silver, and small Government notes.  All the gold has been acquired by the banks, who hold it.  Of course, in Canada the volume of the outstanding notes must expand and diminish, but the reason is not that the note issues are in themselves elastic.  The reason is that there is no real money left in circulation that can be displaced by bank notes, and, therefore, when there is a surplus of currency in circulation this surplus must be deposited in the form of bank notes.

Mr. Korbly.  Yes.

Mr. Morawetz. There is no money for which the bank notes can be substituted.  They have nothing but bank notes, and of course---

Mr. Korbly.  Is not the reason that they put them back that they have no use for any currency ?

Mr. Morawetz.  Exactly.  Bank-note issues will fluctuate in volume automatically, provided you have no other currency in circulation.

Mr. Korbly.  I am very strongly of the belief that if we have gold and bank notes, we do not need anything else.

Mr. Morawetz.  Provided you have nothing else but gold and bank notes.  But if you have gold in actual circulation and you put out bank notes, the tendency always will be for the notes to remain out and the gold to go to the banks.

Mr. Korbly.  Exactly.  That is very clear.

Mr. Morawetz.  That will go on until you have got all the gold in the banks and nothing but notes outstanding.

Mr. Korbly.  Yes.

Mr. Morawetz.  That is the natural process, unless you have a central power like the Bank of France or the Imperial Bank of Germany, which does not put out notes because there is a profit in it or because they delude themselves by imagining that you can create prosperity by increasing the currency, but because they use it only as a means of keeping the banking situation throughout the country sound and safe ---because they use their power to issue notes only as a means to an end, without regard to the question whether there is a profit in it or not.

Mr. Korbly.  By "profit" you mean they will use the most economical instrumentality ?

Mr. Morawetz.  Yes;  but I mean that the managers of these great central banks frequently engage in transactions which are unprofitable to their bank, because they think it their duty, on account of their responsibility for the credit conditions throughout the country.

Mr. Korbly.  That the quantity of gold in the city or in the Nation should not be depleted, for instance ?

Mr. Morawetz.  Should not be depleted;  or they will pay a tax of 5 per cent and put out the notes, although there be a loss, if they think that business conditions demand it.

Mr. Korbly.  Gold always flows to the weak country, does it not ?

Mr. Morawetz.  No;  it does not;  just the contrary.

The difference of opinion concerning the proper methods to be applied in our country exists more regarding the shell than the kernel.  The two questions that remain to be solved to the satisfaction of the Nation are mainly those of form and control.

Less importance, I believe, is being attached to the first one.  It will not be difficult to reach an agreement as to whether this central reserve shall be a simple federation of banks, under some kind of a joint responsibility and without a capital of its own, or whether it shall be a corporation endowed with a large capital;  and if so, whether the banks shall be its only stockholders, or whether the stock should be kept indiscriminately and widely scattered.  The harder problem, on the proper solution of which the fate of the entire measure appears to depend, is that of finding the formula for constituting control and management in a way that will create absolute confidence and at the same time satisfy the people.

There are those who claim that the institution should be managed like the Bank of England ---by business men alone, without any government interference. (This is the scheme which evidently appealed most to the framers of the National Monetary Commission's plan.)

There are those again who claim that the issuing of money with almost legal-tender powers is a semi-governmental function;  and that, therefore, the Government should have a larger share in the running of the institution, a principle applied by France and Germany.

There are even those who claim that the Government should issue these notes directly, without the creation of any special independent organ therefor.

It does not seem necessary to deal at length with this latter contention.  Once we have recognized clearly that commercial paper must be the basis of a scientific note issue, we can see at a glance where it would lead if the Treasury should become the organ for the purchase and sale and the collection of such paper.  It would end in disaster.

The same argument applies, though to a somewhat lesser degree, with reference to the question of the management of a central institution by exclusive Government administration ---it, too, would be fatal.  It would, without fail, bring politics into business and business into politics.

On the other hand, it is evident that if the power of managing this institution would be placed exclusively in the hands of banks  and business men, it would create alarm and suspicion.

To my mind a proper solution would be a division of power between these two factors.  If the Government appointed a little more than half of the members of the board of the central office, and the other half were appointed by the banks from all parts of the country, and if the boards of the branches were constituted in a similar way, but giving a slight majority to the banking element on these branch boards, and if the board could not appoint the managers without the approval of the Government, it would appear that both sides would protect each other from temptation, insinuation, and suspicion.

In any case there could not be any difficulty in finding some modus by which the Government would exercise an effective supervision and control over a management, the direction of which would have the advantage of the experience and acumen of the business and banking community.

It is generally understood that such a central institution would have to be restricted in its functions.  It should deal only with banks and trust companies and should be so constructed that it would protect and strengthen the independence of the more than 20,000 banking units now in existence.  It should be restricted in its dealings to transactions in commercial and banking paper, both local and foreign, and investments in United States Government securities and Treasury notes.  It should furthermore be restricted as to the amounts that it might purchase from each institution, and provisions should be made which would carefully safeguard the central institution, by a system of joint guaranties or otherwise, in case such limits would have to be surpassed.  This would protect the banks of the country, and, incidentally, it would bring about a network of bulwarks, which would shield the central institution from attacks both from within and from without.

When once we shall have succeeded in creating a broad discount market with a large supply of standardized bank acceptances, some of these cumbersome restrictions may safely be abandoned.

It is evident why a central bank with all the wide powers enjoyed by the European institutions could not be conscientiously planned for our country.  It would interfere with the business and independence of the existing banks, and by the power of dealing with individuals and individual firms the door would at once be opened for dangerous abuses, which must be avoided at all hazards.  I disagree with Mr. Hepburn in that respect. He said that the central bank of this country should have large powers. I think it would be most dangerous to do that.  Control of such an institution, both at the head office and the branches, would give such vast power that, no matter whether Government officials or business men were in charge, sooner or later it would become the instrument of selfish ambition.

Statement of Mr. William Harvey Berry.

The Chairman.  Mr. Berry, you understand what we want.  Just give to the stenographer your full name.

Mr. Berry.  William Harvey Berry.

The Chairman.  You were formerly State treasurer of Pennsylvania ?

Mr. Berry.  Yes, sir;  I am a manufacturer at present.

The Chairman.  Have you any bank connection now ?

No;  not directly.  Gentlemen, I want to call your attention especially to a significant fact that is being overlooked or neglected by most of the investigators of the money question.  The question consists of two parts, legal-tender money on the one hand, and "current" or circulating credit on the other.  This latter form of currency is by far the most abundant, and appears mainly as bank checks, drafts, bills of exchange, bank notes, and so forth.  Nine-tenths of our exchanges are made by its use.  This form of currency is not money in a legal sense;  on the contrary, its concrete representatives are always promises to pay money, and involve the necessity of holding money in some convenient place with which to pay them when payment is demanded.

The various banks are the designated places where such payment is made, and while many of the checks presented at the banks are simply deposited to the credit of the holder, a certain percentage of them demand the cash, and this makes it absolutely necessary for the banks to carry a certain reserve of cash against their deposit accounts.  This undisputed fact places a physical limitation upon the power of the banks, collectively, to extend credit, which is fixed by the amount of reserve held.  The exact amount of money necessary may be debatable, but the general fact is not.  Actual money in some proportion is as necessary to a bank as fuel is to a locomotive.

Furthermore, the law has recognized this necessity and requires the national banks to hold a certain reserve of legal-tender cash against deposits, so that in so far as national banks are concerned a legal limitation of their power to extend credit is set up in addition to the physical limitation referred to.  Reserve money is the limiting factor in both cases.

Outlying national banks must hold 15 per cent of cash against deposits.  These banks are permitted to deposit three-fifths of this reserve with "reserve agents," or banks in the larger cities.  These reserve agents are required to hold 25 per cent of cash against all deposits, but are permitted to deposit one-half of their reserves with the large banks in certain cities called central reserve cities.  The central reserve banks must hold 25 per cent of cash intact against all deposits.

The reserve money, being useless to a bank when held in its vaults, is sent to the reserve and central reserve cities to the largest extent that it can be spared, on the assumption that it will be earning some thing and can be recalled at will.  Enormous sums of money are thus drawn from the outlying country to the reserve cities, and thence to the central reserve banks in New York, Chicago, and St. Louis.

Complaint is being made and the central bankers criticized for this concentration.  They are not at fault unless they are responsible for the law as it now exists.  The law alone is to blame for the accumulation of millions upon millions of reserve money from the outlying districts into the central reserve banks.  The law compels its assembling in the outlying banks, makes it useless or unprofitable while held by them, and opens the way for its use in the centers.

The published reports of the Comptroller of the Currency are interesting, though extremely deceptive and misleading.  They are true, however, and according to the law.  For instance, in his annual report for 1912, he shows that the national banks held the required reserve.  He says, on page 8:

On December 5, 1911, against deposits aggregating $6,670,804,612 the aggregate means available to meet liabilities were $1,649,290,440, or 24.72 per cent.

While in the table on page 2 he shows that the total cash held by 7,328 national banks was $908,359,000 including $3,000,000 of nickels and pennies, as well as $82,890,000 of clearing house certificates.  Only $825,545,000 of actual money was in the banks, or almost exactly one-half of what is made to appear from the language on page 8, or 12.4 per cent instead of 24.72.

It also appears from the same table that 7,328 national banks owed net to State banks and trust companies $824,727,532, leaving only $800,000 that could be said to actually belong to the national banks ---one-tenth of 1 per cent, or just 1 cent of cash for every $100 of obligations.

It appears from this that not only are the reserves of the national banks counted and recounted until they appear to be double what they really are, but the reserves of all other banks must be absorbed by the national banks in order that they may have any reserve at all to count.

The significant fact, however, is that with all the shifting of reserve money from outlying banks to the national banks in the centers, these banks are not able to gather sufficient cash to maintain the legal reserve against deposits when the demand for discounts is fully met, and this, to my mind, is the reason, and the only reason, why this demand is not always met, and panic thereby made impossible.

No bank can discount a note or extend credit unless it has a certain (the legal) percentage of cash to hold in reserve against the deposit, and there has not been a moment in 10 years when the banks, collectively, held sufficient cash to enable them to grant all the legitimate credit that the country needed.  This being true, an excessive interest rate is certain and discrimination between borrowers is inevitable.  In this sense a money trust does, and will continue to exist as long as it remains impossible for the banks, collectively, to increase their holdings of legal cash, so as to be able not only to meet but to compete for the privilege of meeting the entire demand for credit.

An inspection of the table on pages 39 and 40 of the Comptroller's Report for 1912 will reveal the fact that the banks, collectively (25,195 of them), all kinds included, have been responding to the demand for credit far beyond the safe limit.  I have charted this table so that a glance will reveal its startling lesson. [Mr. Berry here displayed the chart referred to.]

Beginning in 1865, with the cash holdings at 25 per cent of obligations, credit was expanded until 1872 the reserve fell to 12 per cent, and the panic of 1873 followed.  The expansion went on from 1874 to 1879, and the percentage of reserve fell to 9.7 per cent, and the panic was imminent and only prevented by the deposit of 250 millions of Government funds in banks.  This raised the reserve to 12 per cent in 1880, but it steadily fell to 10 per cent in 1893, and panic followed.  Three hundred millions of credit was withdrawn, and widespread disaster followed.  This depression continued with unremitting severity until the gold discoveries in 1897 and 1898 increased the money in the banks.  Following the increase of money, credit expanded with great speed, faster indeed than the money, and the reserve was again forced down to 7.9 per cent in 1906, and panic followed.  New credit was denied, and 350 millions of existing credit was withdrawn in 1907, and reserves restored to 10 per cent in 1908, since which time expansion has again proceeded until the reserve was again down to 8.2 per cent in June, 1912.

The Chairman.  The total cash of all the banks, as compared with total liabilities of all the banks ?

Mr. Berry.  Yes;  8.2 per cent.

This expansion of credit is an absolute necessity to the growth of business, and there is a tremendous demand for credit, to which the banks can not respond.  They have already gone far beyond the known safe limit, and panic may break at any time.  I appeared before this committee in January, 1907, and pointed out the conditions then existing, and predicted the panic, which followed in October.  The conditions existing now are almost exactly similar to those preceding the panic of October, 1907, except as to the condition of the copper market;  and it is my opinion that unless this difficulty of scarce reserves is removed, another panic will occur.

There is no other reason why credit does not expand.  Unlimited resources, 23,300 solvent banks, abundant wealth, bumper crops, and an ambitious and capable people are held in leash solely by the scarcity of reserve money.

A glance at the comptroller's report for 1912 (pp. 39 and 40) shows that the average expansion of bank credit in the last 10 years has been at the rate of 825 millions per year.  If we exclude the panic year of 1907, in which no new credit was created and 300 millions of existing credit was withdrawn, the average would be 950 millions, and in the most active years it was above one billion.  It is a fair assumption that the normal increase per year would be one billion or over, and to carry this credit on the legal basis of 12 per cent of cash would require the banks to secure 120 millions of additional money each year.

It is the experience of the last 50 years that the banks get about one-half of the new money that comes into circulation, and therefore an annual increase of 240 millions per year is necessary in the country in order that the normal demand for credit may be safely met by the banks.  This is, of course, only an approximation, but it is very close to the truth.  Under the existing law there is no way in which our stock of legal tender money can be increased, except by the mining and minting of gold, or its importation.

In the last 32 years the flow of gold in and out of the country has resulted in an annual average importation of $5,000,000 of gold.  The production of gold in this country is now about $100,000,000 per year, 30 per cent of which is used in the arts, leaving $70,000,000 for the coinage.  Seventy-five millions, therefore, is the dependable annual increase in money volume in this country.  One-half of this, or $37,500,000, is the total amount of annual increase that the banks can hope to secure, as against the $120,000,000 they absolutely need.

This is the most astounding economic fact with which we have to deal, and I am amazed to find that some of the professors of political economy in our large universities are proposing to reduce the supply of money by exacting a seigniorage charge at the mint !  This is the exact opposite of what is needed.

This idea that money is depreciating arises from the fact that in recent years the price of foods and other perishable products has risen, and still continues higher than formerly.  This rise in the cost of living is fully accounted for by other circumstances than the increase of gold production.

First, the concentration of population in the cities and towns at the expense of the farms.

Second, pure-food laws that have raised the average quality and cost of such products.

Third, cold storage that makes possible the holding of perishable products for an artificial price.

And last, but not least, the formation of trusts and combines in all branches of industry and trade has set up a possibility of price control that negatives the natural forces of supply and demand.

The growth and development of monopoly is one of the necessary fruits of scarce currency, and their final dissolution will not be safely possible until this basic compelling cause is removed.

The cost of living is not a reliable index of the relative abundance of money.  It is to the more permanent forms of wealth that we must look for reliable information on this point.  Houses, factories, rail roads, etc., are hypothecated as security for debt, and, with the exception of the period from 1898 to 1902, these forms of wealth have tended to lower prices when freely produced.  Since 1905 the average price of 30 stocks, 21 rails, and 9 industrials has fallen 21 points.  Since 1902 Pennsylvania Railroad stock has fallen from 160 to 122, or 38 points, and this in face of the fact the expansion has been practically stopped.  Mr. Hill affirms, and I think truly, that five billions of credit is now needed by the railroads of the country alone for legitimate expansion.

With a condition set up in which the banks have their reserves reduced to the minimum legal and physical limit, and no possible way is open to them by which they can convert any portion of their enormous surplus of assets into reserve money, a "corner" or "monopoly" in credit is created, for which no man or set of men can be held responsible.  Discrimination in granting to favored interests and denying to possible competitors such meager credit as the natural increase of money from the coinage of gold makes possible is as certain to follow as day follows night.  The interest rate will also be arbitrary and higher than normal.

This condition is not chargeable to the banks or bankers, large or small.  The comptroller's report, to which I have referred (pp. 39 and 40), shows that the banks have an unimpaired capital and surplus of four billions, and liquid(?) assets in the shape of stocks and bonds amounting to five billions;  but when this chronic condition of depleted reserves which has existed in the banks, collectively, for the last 10 years is set up, these so-called liquid assets are not liquid at all.  If they are forced to sell the price recedes, and when sold at any price the general situation is not and can not be helped at all.  If one bank or city secures additional reserves by this means, another must lose it, and the general situation remains unchanged.

But this discrimination is not the only evil result of this condition.  The work of the professional stock gambler is made more safe and certain than marked cards or loaded dice can make the ordinary gambler safe from risk.  I refer to gambling in the low and offensive sense in which we use the term, and not as synonymous with speculation.  Some confound these terms.  I think they are widely different.  In most of our commercial and productive activities the element of speculation is necessarily and harmlessly present.  I exchange my money for a horse because I think the horse will be more valuable to me than the money.  The owner of the horse exchanges with me for exactly the same reason.  Either of us may be mistaken, but both of us may be and generally are right.  We may both profit by the exchange, but since the unknown future is involved, we are necessarily "speculating" or taking a chance.  It is an honest chance, however, in which the success of one party does not depend upon the failure of the other.  Rightly understood, I believe that all the material progress of the race is due to the fact that inventors, theorists, and business men have speculated or taken chances on the future.

Gambling may be easily differentiated.  If I bet on a horse race or anything else my success depends upon the failure of my competitor.  A certain degree of honesty and decency may inhere in a fair horse race, but the introduction of tricks and deception reduces it to the low level of ordinary larceny.

With the bank reserves at the lowest legal level, a coterie of men, or even one man, may draw checks for, say, ten millions on the New York banks and put the money in safe-deposit vaults at 2 o'clock.  This will make it necessary for the banks to call forty millions of credit the next morning.  The borrowers must furnish the money at once by forcing the sale of stocks.  The market goes down at once, not because the earning power of the stocks, the true source of value, is impaired, but solely for the reason of forced sales.  The conspirators buy them, the ten millions are let loose and reach the banks again in due course, the credit is greatly expanded, and stock prices recover.  The conspirators sell at the advanced rates and are ready to work the trick again.

This is no fancy sketch.  Once in a while we catch a record of such a transaction, but they frequently occur and escape public notice.  In the week ending December 9, 1911, the stock market in New York was "off" several points, and on December 7, 1911, the following significant paragraph appeared in the financial column of the Philadelphia Evening Bulletin:

Last week there was some $12,000,000 unaccounted for in the bank figures;  that is to say, the cash loss was that much in excess of the visible movement.  Just how such a wide discrepancy could arise, with trust company figures also available, is not easy of solution, for there are but three directions in which money could go ---through the subtreasury, interior movements, and exports or imports.

Twelve million dollars had disappeared by the invisible route.  The conspirators had drawn it and placed it in safe-deposit vaults.  Reserves were thus depleted, loans were called, sales forced, and the market depressed.  In the following week the bank statement came around all right.  The depressed stocks had been purchased with the hoarded money.  The money again came into the banks, loans were expanded, and the market gained several points.

With reserves abundant, and a way open for the banks to increase them ad libitum, at the expense of their bond holdings, outside of the regular market, this manipulation would be impossible, and the occupation of the low gambler would be gone.  But these are both minor evils as compared to the condition of non-employment incident to the cessation of business in the panics that are sure to result from the stoppage of credit expansion, or from the prior restraints that are enforced to prevent panic.

That any man should want work and not be able to find it is the crime of civilization, and I make the statement, without fear of successful contradiction, that no such case exists that is not traceable ultimately to this cause.  We are seeking a remedy for the evil, and I am trying to direct attention to the cause of it, in order that the true remedy may be applied.  The lack of legal reserves is the basic cause of the trouble, and the remedy lies in one of only two possible directions.  We must either remove the legal restraints by reducing the required per cent of reserves or provide a means whereby the banks can liquefy at will certain of their assets outside of the regular market, and thus maintain the required reserve while they extend credit in sufficient volume to meet the demand.

The question is simply one of method, and the method we employ should, first, be safe and involve no contravention of the principles of sound finance.

Second.  It should be easily adapted to the existing machinery of banking.  It should involve as little change as is possible, consistent with absolute effectiveness.

Third.  It should look toward the restoration and maintenance of competition among independent bankers and the prevention of monopoly in credit, rather than in the opposite direction.

I will propose a remedy that I think will be found to meet all of these requirements.  We have now a banking system composed of 25,195 independent banks.  They are located in every part of the Nation.  They have correspondents and clearing-house relations established on a universal scale.  The system has grown up naturally in response to the development of the country, and so far as machinery goes is capable of supplying the country with all the credit it needs.

The banks collectively have four billions of unimpaired capital and surplus and easily convertible assets (stocks and bonds) amounting to five billions, so that no possible question of solvency or lack of capital can be raised.  The banks collectively hold, however, only $1,572,900,000 of actual cash, including the bank-note redemption fund;  $108,000,000 of this is in bank notes, leaving $1,464,900,000 of legal tender or reserve money against $17,791,000,000 of obligations, or 8.2 per cent.  This is the weak spot in the system, for with all the provisions in the law, by which the reserve cash is made to do double or triple duty, the banks have always been compelled to restrict the expansion of credit before it reached this point.  They are at this moment in that situation.  From June. 1911, to June, 1912, the banks increased their obligations by $1,150,000,000, and in the same period were only able to increase their cash holdings by $18,800,000, or 1.63 per cent of the new credit.  This reduced the total reserve from 9.3 per cent to 8.2 per cent, which was about the breaking point in 1907.  They are now compelled to refuse credit, and panic is threatened.

The national banks are now permitted to hypothecate their Government bonds and receive, practically free of interest, their equivalent in bank notes.  All but one of the national banks have done this to a greater or lesser extent, some of them reluctantly and under pressure from the Treasury Department, but all but one has complied, so that a well-beaten path from each bank directly to the Treasury Department already exists.

The bank note, however, is a credit instrument and not money in the legal sense and can not stand in reserves as a basis of credit.  Nor can it ever be justly empowered to do so as long as it remains a credit instrument.  These notes are put into circulation by the banks, and, to the extent that they can be kept out of the banks and in the hands of the people, they serve their purpose well;  but they come into the banks as deposits, against which legal tender money must be held, and to secure the legal tender they are sent in for redemption.  Out of $739,940,000 of them in circulation in 1912, $649,954,000 was sent in for redemption during the year, or 87.8 per cent.  So great was the flow for redemption that the 5 per cent fund held for the purpose by the Treasury was entirely inadequate.  This fund was overdrawn during the entire year and at times to the extent of over $26,000,000.  Eight per cent instead of 5 per cent would have been necessary to cover this rate of redemption.

The bank note, as a means of answering the demand for credit, is a failure.  It is a convenient and mobile instrument, and, being payable at any bank to any bearer, one would think that a very small reserve would answer for its redemption.  These notes are manifestly over-issued, i.e., they are issued in excess of demand, as proven by the fact that a larger cash reserve is necessary to maintain them than is required to float the ordinary checks of many banks.  This has been notably true in in the past five years.

It has been assumed by some, and it would seem that the Treasury Department has entertained the idea that our currency problem could be solved by increasing the issue of these notes, and I am giving special attention to them for this reason.  Credit notes of any kind are useless beyond the point of absorption in the hands of the people.  To this extent they displace the legal tender and allow it to flow into the banks, but like all other credit instruments they require a legal-tender reserve, which becomes very large when they are over-issued.

We have seen that the difficulty lies in the lack of reserve cash in the banks.  We have also seen that the mining and minting of gold is the only way we can increase our reserve cash.  We also have seen that the gold supply from both mining and importation is insufficient, and I think that most of the practical men who have studied the problem have concluded that a supplement of legal-tender paper is the only safe remedy.  At least, I have not heard the other alternative, i.e., to reduce the percentage of reserves required, seriously proposed.  Convincing reasons may be given why reserves should be increased instead of diminished.

The Aldrich plan proposes as a remedy a central reserve association where the cash reserves may be concentrated.  The efficiency of this arrangement was illustrated to me by a gentleman from New York.  He traced an analogy likening the present system to the old-fashioned well or cistern at each house, and the Aldrich bill to a city with a central reservoir in its water system, with pipes leading to each house.  In case of fire in any locality, the "reservoir" was available.

I thought the point ill taken, for the reason that our trouble does not arise from lack of machinery (reservoir and pipe lines);  we already have them in profusion and to perfection.  As we have seen from the comptroller's report, our reserves are already "concentrated," and I think the gentlemen who are managing the reservoir are past masters in the reservoir and pipe-line game;  but reservoirs, pipe lines, and past masters to manage them are no good without water.

Our banking system is all right, now, but our supply of money is barely sufficient to fill the pipes, and there is none in the reservoir that can be spared.  If we open a spigot to put out a fire, or even to wash down a payment in an outlying district, a conflagration starts in the reservoir (Wall Street).  There is not sufficient water in the whole system to supply the ordinary daily needs of the people, and the extra drain on wash day creates a famine, to say nothing of a fire.  I fail to see how a larger "reservoir" would help the situation.  More money is what we want, and I think that the promoters of the Aldrich plan are aware of it, though they do not frankly confess it.

The bank note that is to issue from the new "reservoir" is the significant thing in the Aldrich plan.  The vast and complicated machinery proposed is entirely unnecessary and immaterial.  It only serves to befog the real question.  If these notes are given legal-tender powers and thus made competent to stand in bank reserves, they will serve the purpose and provide a remedy for our trouble.  If they are not, they will be as useless as our present bank note.  The Aldrich bill proposes to give them this power, and this is really the crucial point of the whole question.

I shall oppose any and every plan that proposes to confer legal-tender power upon a credit note that issues from or directly benefits any private citizen or corporation.  The public credit, in which every citizen participates, is alone competent to carry such a power.  The right of Government to issue notes in response to an equivalent sacrifice to the community and give them legal-tender powers can not be seriously questioned.  It is universally conceded and has been practiced throughout the world in all ages.  The right of Government to confer the legal-tender power upon a credit note issued by private citizens without the sacrifice of an equivalent can not be conceded by any stretch of the imagination.

If the legal-tender notes of the Bank of England are of this character, their existence does not prove the practice to be either wise or expedient.  The Bank of England is empowered to issue legal-tender notes up to 100 per cent of the Government bonds it holds, and also to issue notes equal to the amount of gold coin and bullion held in its vaults.  The bank is also permitted to issue $36,000,000 of notes against "other securities" in place of two-thirds of the notes formerly circulated by other banks which have surrendered the privilege, so that $36,000,000 out of $259,000,000 (report of 1908), or about 15 per cent, of its notes are "credit notes" in the meaning of our definition, i.e., their issue has involved no sacrifice of an equivalent, for the securities held against them still draw interest either for the bank or the note holder.  The $53,000,000 of notes issued by the bank against the Government bonds it holds are of similar character, but the bank pays to the Government $1,000,000 per year (4 per cent) for its monopoly of the note-issuing privilege in a radius of 65 miles about London.  In addition, it must pay to the Government all the net profit upon the issue of notes against securities other than Government bonds or gold, making a total payment (in 1908) of about $2,000,000 on $90,000,000 of notes, or about 2 per cent.  The balance of the circulation does involve the surrender of an equivalent of gold to disuse, the note being similar to our gold certificates.

From all this we gather that the interests of the people are some what conserved by what is practically a 2 per cent tax on the credit circulation, but to the extent of the difference between 2 per cent and the total net earnings of the credit circulation, they are defrauded, and the principle is just as vicious as though the whole benefit went to the bank.

The credit of the nation should alone circulate as legal tender, and the Nation should be the sole beneficiary.  The legal-tender notes should emanate directly from the Government in exchange for the bonds, and such other credit notes as are circulated should not be legal tender and therefore capable of use in a further expansion of seven or eight times their volume of bank credit.

Money is a community instrument, and should be created by and for the use of the community in such a way as to automatically respond to the demands of business, and at the same time guarantee its purity with the average of other forms of wealth, and its just relation to the debts it is empowered to cancel.

Circulating credit is a private instrument created by and for the convenience of private citizens, and should rest entirely upon the solvency of those who create and use it.

But, waiving for a moment, this basic objection, I affirm that the present bank note is as eligible to receive this power as any credit note can be, and that the extension of legal tender or reserve power to these notes will accomplish all that can be accomplished by the other form, and involves no new machinery whatever or a particle of change in the existing machinery.  One billion of new legal tender money would be instantly possible by this process, and from three hundred to five hundred millions of it would appear in the banks, upon which from two to four billions of new credit would be expanded, the demands for business met, and the monopoly of credit broken up.

These notes (the present bank notes) are absolutely secure, as secure as is the Government upon the credit of which they rest.  Not one of them was ever presented for redemption because of distrust, but solely because of mutilation or to secure legal tender for reserves.  If we are to have a legal-tender credit note issued by private citizens, our present bank-note circulation is the ideal for that purpose.  It can be instantly applied in every part of the country at a minimum cost (almost nothing) and with maximum efficiency in every part of a competing system.

But such a course would be in contravention of every principle of sound finance, in that it provides for the creation of money with out demanding an equivalent sacrifice, and would make possible the creation of 10 to 12 volumes of new credit upon 1 volume of existing credit.  For this reason, and the further reason that private interests would reap an unearned benefit from it, I would oppose it.

The essential difference between money and circulating credit should be clearly in mind.  Money, either metallic or paper, is a concrete embodiment of government decree, which, when tendered by a debtor to his creditor, cancels the debt.  Such money can only come into existence justly through the surrender of an equivalent in value.

The law presumes that the mining of gold involves a sacrifice of time and labor in its production equivalent in value to the money into which it may be logically coined, and when the gold is coined into money it can not be used for any other purpose.  The gold is sacrificed to the money use.  It may now be used to cancel debt or other exchange purpose, but in no case can the miner get more for it from society than he sacrifices to society.  If he elects to have his gold made into a watch chain, or an ornament, he can not have it made into money at the same time.  He can, however, float a credit upon it.  He may give a mortgage or other lien upon it to a bank, and receive a ·"credit" that will circulate as checks, and secure goods for him in exchange, while he still has the use of the watch or ornament.

This is the essential difference between money and circulating credit.  Money is a means of paying debt;  and circulating credit, in the form of checks, drafts, or bank notes, etc., is in itself a debt or promise to pay money.  Money comes into existence in response to the sacrifice of an equivalent;  a credit instrument comes into existence without the sacrifice of an equivalent, and while it answers the purposes of currency, it must be considered as the exact opposite of money, so far as its origin is concerned.

A national bank hypothecates its bond with the Government, but still owns and draws interest upon it, or has the use of it.  The bank receives a credit in the form of a note, which it uses in exchange.  This transaction as between the bank and the Government is exactly similar to the transactions between the bank and its customer.  The bank takes the security of the borrower (expressed or implied) and gives him credit upon its books.  This credit circulates as checks, etc., and secures the exchanges wanted, but the customer still has the use of his asset.  No sacrifice has been made in either case, except the interest charge.

With an equivalent sacrifice involved in its issue, a guarantee against overissue is to be presumed;  but with no sacrifice involved, an over-issue may easily occur.

The banks of the Nation are perfectly solvent;  they have assets in abundance to cover all their liabilities.  They reported in 1912 a surplus of $2,166,000,000 over all liabilities, including their stock ---$2,010,000,000.  The one thing they do not have is legal-tender money with which to safely carry credit in sufficient volume to maintain business at full activity, nor is it possible for them, collectively, to secure it.  Moving it from one bank or from one country to an other does not avail.

The banks are safe;  they can and do call in their loans in an emergency, and refuse to extend credit at will.  But business is not safe.  The calling of loans and the refusal to extend credit ---on good security--- is disastrous to business;  and, confronted with the constant menace of contracting credit, which will compel forced sales and destructive slaughter of prices, business men have sought and found the only possible remedy, to wit, trusts and combines that can and do limit the volume of business to the credit available, restrain production, sustain prices, and avoid disaster.  By this means business, especially big business, can be and is made safe, while the final burden of reduced activity, partial or complete idleness is forced upon the workmen of the Nation and is without remedy.

I know, of course, that the workmen of the Nation have sought, by the organization of unions and federations to relieve themselves of the direful consequences of restricted industry, but when the terrible cost is counted, and we remember that nothing more than an approximate distribution of the effects af idleness has been, or ever can be, effected by this means, we can understand the growing unrest and alarming tendency to socialism that is apparent.

The restriction by law of the production of legal tender money to the mining of gold alone, by reason of the lack of sufficient opportunity to mine gold, prevents the free flow of effort into a field where a scarcity and consequent tendency to high value exists, and the resulting scarcity of legal tender money prevents a safe and adequate expansion of credit, and this sets up a continuous tendency to lower prices in the permanent forms of wealth when such wealth is freely produced.  The gold mines are doing all they can;  every natural opportunity known is being worked to its utmost capacity, and the relative scarcity continues.

This tendency to lower prices in response to active production compels the formation of trusts and combines in order that the productive activity may be effectively restrained and a disastrous fall in prices prevented, and when formed as a weapon of defense they are easily transformed into weapons of aggression.

Monopoly ---restraint of production--- in currency is not only bad in itself, but it sets up a condition that compels us to endure monopoly in all other lines, or, as the only alternative, submit to a decline of prices that will ruin everybody but the bankers, and even they would suffer.

I have no quarrel with the bankers, especially the bankers of the United States.  I have already stated, and now reiterate, that the banking system of the United States is superior to that of any country on the globe.  They have furnished credit of greater mobility and value to the business than any other;  they have accumulated capital and built up surplus funds to an extent and in stability capable of furnishing all the credit the Nation needs.  The weakness of the system is in the lack of reserve money;  and my inquiry into and criticism of, the currency reflects only upon the bankers when they assume to defend this inherent weakness of the currency system.

There is but one argument that is or can be offered against the strengthening of the reserve fund behind our bank credit, to wit, "It will decrease the earning power of the banks."  I submit that this is not a sufficient reason, even if true, and I will presently show that it is not true.  We do not hesitate to compel railroads to use safety devices to protect travelers and employees, even though the cost of such devices was certain to reduce their earnings.  An adequate safety factor is just as important in our circulating credit as it is in bridges or elsewhere.

I say a "safety factor," using the term as an engineer would use it in building a bridge.  He knows by experiment the breaking strain of his material, and he proportions his elements so that the maximum load will put a strain upon them much less than he knows they will bear.  He calls this his "safety factor," and with it covers the possibility of failure from hidden defects in the material, deterioration from weather influences, or sudden shocks.  No sensible engineer would load a structure to anywhere near the final strength of its members.  Nor would a sensible banker load his cash with a burden of demand liabilities anywhere near the point of failure.

The per cent of cash that is necessary to safely carry a unit of credit can not be definitely stated;  certainly it is variable, higher in some places than in others, and higher at some seasons of the year than at others, and differing in different years.  But our margin of safety should cover all these differences, and provide always for the maximum strain.  While the actual amount or proportion of cash necessary to carry credit may not be known, the necessity for some amount is generally recognized, and laws have been passed requiring national banks to hold a certain percentage of cash against deposits.  This fixes a legal limit beyond which these banks can not expand credit.

The banks are doing a safe business;  they have accumulated vast assets, and a surplus above dividends of over $2,000,000;  their stock is above par, some of it several hundred per cents while general business, outside of certain trusts that are in absolute control of their special lines, is never safe, and has suffered untold losses time and again through the failure of credits and the general wreck of industrial enterprises.

We should propose nothing that would reduce the safety factor of the banks or their total earnings.  We should propose, however, a remedy that will increase the safety factor in general business.  The banking business is safe;  our purpose should be to make general business equally safe, and render unnecessary the trusts and combinations in restraint of trade.  We should set up a condition of free and unrestricted production where the demand for labor will always equal or exceed the supply, and restore conditions under which all men may be free and self-respecting.

The Aldrich bill is proposed as a remedy for existing weaknesses, and is approved by many of our bankers.  We will now discuss it.  Until all the details of the Aldrich plan are known, it is not possible to critically discuss it;  but so far as it is revealed, it fails to meet the necessities of the case, and is objectionable for the following reasons:

First.  It proposes a lot of new and complicated machinery, which is entirely unnecessary, and which, if effective, would be expensive and put an added burden upon business.  Credits are sufficiently expensive already.

Second.  It proposes a unification and consolidation of the whole banking system of the country, bringing it into shape for central control, contrary to the growing sentiment against such concentration.

Third.  It proposes no remedy whatever for the basic difficulty (scarce money).  It only proposes an increase of credit without a corresponding increase of lawful money, which means a further reduction of the percentage of actual reserve against demand obligations.  The remedy lies in the opposite direction.

Fourth.  It proposes to issue its notes against the miscellaneous assets of the banks ---including the discount paper of individuals--- and to give these credit-notes the power to stand in bank reserves, thereby substituting a credit for lawful money in the reserves held to insure prompt payment of the checks of depositors.  By this means, the fundamental principles of issuing money are violated, in that no sacrifice whatever is demanded to check the issue.  The securities hypothecated continue as an interest-bearing asset of the bank.

The opportunity is thus given to the so-called big business interests to practically coin their securities into money and enjoy the use of the money, practically without interest, as a basis of expanding credit, while they still hold and use the property represented by the securities.  This may account for the support these interests are giving this plan.

The power of these great interests is already a menace to free institutions.  This plan will practically multiply their holdings and increase their power of discrimination and their control of industry.  Under this plan it will be possible for a bank in New York or other reserve city, to take the note of one of its customers for, say, $100,000, having 28 days or less to run, and, by indorsing it, have it rediscounted at the central bank and receive in exchange bank notes that will stand in its reserves and upon which $400,000 of further discounts may be made.

Unlimited inflation of credit upon credit is thus provided for, resulting in an enormously increased revenue in the banks without increasing either their investment or their responsibility.

Fifth.  The sole safeguard offered by the bill against panics or a violent collapse of credit is in the discretionary power to raise the discount rate and prevent the expansion of credit beyond a safe limit, which limit is to be determined by the discretion of the managers of the central association.  This will simply anticipate, distribute, and perpetuate the evil of restricted business and scarce employment ---the very thing which we seek to remedy.

Sixth.  It provides no assurance whatever of automatic expansion or regulation of the volume of currency to the needs of business, and, in short, it serves no useful purpose whatever.

Seventh.  It proposes to take over into private hands, hands that are entirely removed from the reach of the people even in the ordinary course of an election, to say nothing of recall, the money-issuing function of the Government and the power to regulate its value, a function more potent and powerful to govern and control the industrial and political destinies of the Nation than all other agencies combined.

A thorough understanding of the currency situation and the true philosophy of sound money will make it impossible for one to indorse the Aldrich bill.  It is the most dangerous proposition ever presented to the American people.

That there is imperative need of the immediate correction of the evils resulting from the defects in our currency which we have pointed out is obvious, and unless we can submit a satisfactory remedy, our criticism of the Aldrich plan will amount to little, and having pointed out the evils and shown the danger, injustice, and inadequacy of the Aldrich plan, we now submit a plan for relief.

As the first step in this process, we would raise the percentage of legal tender reserves in all banks (collectively) to, say, 15 per cent of obligations.  This would tend to reduce the percentage of profit now realized by the banks.  Let us inquire how much.  The banks collectively, in 1912, carried:

Loans and discounts .............. $13,953,000,000
Stocks and bonds ................... 5,300,000,000
Total ........................ 19,253,000,000
If we place the annual earnings at 5 per cent it equals ................... 962,650,000

The capital of the banks is ........................ 2,010,000,000
Surplus ............................... 2,166,000,000
Total investment ............................. 4,176,000,000
Total earnings .................... 962.650,000
This equals 23 per cent upon the entire investment.

In other words, the general business of the country is paying to the banks for the use of the present unsafe credit $962,650,000 per year, yielding a gross revenue upon the money invested in banking of 23 per cent;  what the net revenue is we do not know.

If we require the banks to carry a 15 per cent reserve against their total liabilities, they would need $1,000,000,000 more of legal tender money for which they must sacrifice $1,000,000,000 of bonds or other securities and lose (at 4 per cent) $40,000,000 of revenue.  This reduce their gross earnings to $922,650,000, or 22 per cent of capital and surplus, a loss of only 1 per cent out of 23 per cent, or 4.5 per cent out of 100 per cent of gross earnings.

Whether the payment of $962,650,000 per year by the general business interests for the use of credit is too much or too little for the banks to earn, need not concern us, although it would seem that $662,051,000 would easily cover operating expenses and leave $250,599,000, or 6 per cent dividend upon the capital and surplus of the banks.  This would cause their stock to sell above 200.  Bank stock usually sells for a good price, some of it as high as 1,200 per cent.

What we should insist upon, however, is that whatever we pay for credit we have a right to demand that it be issued upon a basis that will be safe for business as well as for the banks;  safe for business in the two-fold sense that a severe failure here or there would not shake it into collapse;  and second, that it would always respond to legitimate demands for expansion.

But the question at once arises as to how we can increase the factor of safety in cash reserves to 15 per cent.  Certainly not by calling loans, for this would take at least $6,000,000,000 of credit out of circulation and paralyze business all over the land.  Certainly not by issuing more bank notes.

The issue of $1,000,0000,000 of bank notes secured by $1,000,000,000 of bonds would fail of the purpose for reasons that we have already discussed.  Seven hundred millions of dollars are already issued, but $600,000,000 of them return in a single year for redemption.  They are not money, but are a form of credit similar to checks, and our trouble is that, while we have too little credit for use in business, we have too much credit for the cash in hand.  What we want is more money in the banks against existing credit;  and the issue of more unsupported credit in any form is the exact opposite of what we need, and furthermore it is impossible.  But the banks are holding $5,300,000,000 of stocks and bonds, and we have spoken of the sacrifice of $1,000,000,000 of bonds.  If the banks were to throw $1,000,000,000 of bonds on the market the market would go to pieces;  but even if it did not, the sale of the bonds in the open market at par would simply transfer money from one person or bank to another and add nothing to the reserve.

If, however, we open a bureau of issue and redemption in the National Treasury, and allow the banks to "sacrifice" or "coin" their billion dollars of bonds ---or any desired amount--- into new United States notes of full legal tender power, we will solve the problem.  The banks, collectively, could strengthen their cash reserves at the expense of their bond holdings and safely respond to the demand for credit at any time.  I would call this simple process the free coinage of public credit, a vastly different thing from the free coinage of private credit.  Every public bond is an assurance that an equivalent sacrifice has been made to the public, and that a community asset or public utility exists to represent it.  Private credit involves no sacrifice whatever to the community.

By this process the present bank-notes can be justly converted into legal-tender notes.  The name and location of the issuing bank can be printed on one side of it and the law, legend, and seal of the United States upon the other.

The plan in detail is as follows:

First.  Determine the percentage of cash reserves that will safely carry deposits and other demand obligations.  An average of 15 per cent of legal-tender money against all demand obligations, in my judgment, would be sufficient.

Second.  Open the way for any and every bank in the Nation to "qualify" as a bank of issue by complying with certain conditions of inspection, etc.

Third.  Require every bank that is "qualified" (to issue money to "coin" its bonds) to carry its determined percentage in its own vaults.

Fourth.  Provide that any qualified bank could surrender the bonds of the Nation, and receive in exchange, new full legal-tender paper money, equal in amount to the market price of the bonds.  Government bonds thus received to be cancelled as fully paid.  (State and other bonds having the taxing power behind them might be included if found necessary.)

Fifth.  The notes thus issued to be a full legal tender for all debts, public and private, in the United States, and redeemable on demand in gold of the standard weight and fineness of the coins of the United States.

Sixth.  Establish a department of issue and redemption in the United States Treasury and maintain therein a gold redemption fund of not less than 20 per cent of the outstanding notes.  This fund to be maintained and replenished when necessary, by the sale of new 3 per cent Government bonds for gold in the open market.

Seventh.  Proclaim that after the expiration of a certain time the Government would no longer hold a dollar for dollar reserve of gold against the outstanding gold certificates or other paper currency, and would redeem any and all such paper on demand, in gold coin or silver dollars, at the option of the holder.

Eighth.  Deposit the daily receipts and all other funds of the Government in the banks on approved security and at a rate of interest to be fixed by competition.

Ninth.  Make it a criminal offense for any two or more banks to "conspire" to fix the interest or discount rate or to limit the expansion of credit.

This plan provides for the issue of legal tender paper money indirectly by the Government in exchange for service rendered by private citizens to the public in building roads, etc.;  and by reason of the indirect issue through the banks in exchange for bonds an automatic adjustment of the volume to the needs of business is secured, and all the principles underlying the free coinage of gold are complied with.

The self-interest of the bankers, which is the most persistent and powerful commercial force with which I am acquainted, will operate to bring it into existence in response to demand, and the same irresistible force will prevent its issue in excess of demand.  The operation of this force will be made clear as I proceed.

Before discussing this plan in detail, I would say first that the plan in general conforms in every particular to the principles involved in the free coinage of gold.

Whosoever holds a Government bond must be supposed to have made an equivalent sacrifice to get it, and whoever by this means adds to the legal-tender currency must make an adequate sacrifice to do so.  He must sacrifice the bond (cease to count it as an asset or draw interest upon it).  But the bond is a time obligation, bearing the current rate of interest, for which he is to receive a non-interest-bearing demand obligation, and unless there is an opportunity to use the money to better advantage than in an investment at current rates, he will not exchange it.

There could be no inducement to an individual to make the exchange.  If an individual owned a bond for $1,000, and wished to pay a mortgage on his house, he could sell his bond in the home market for as much as he could get from the Government, and use the money to cancel his mortgage, so that there is no need to extend the coinage privilege to individuals, although there is no objection to it.

But a qualified bank having a $1,000 bond in its assets, would see an inducement to make the exchange if its reserves were at the lowest limit (15 per cent), and a customer with good security wanted a note discounted for $7,000 at 4 or 5 per cent, and would do so whenever a demand for legitimate well-secured credit appeared, but unless the demand for credit appeared, the bank would hold on to its bond.

Now, a demand for increased legitimate credit will appear when unpledged capital and idle labor exist together in a community, but will not and can not appear when there is no idle labor, no matter how much unpledged capital exists, so that we have in this fact an automatic check upon the issue of this form of legal-tender money.  Legitimate demand alone, arising from idle labor, would call it out, and full activity would stop its issue.

The vice of issuing money directly for service is in that no automatic restraint is involved, and depreciation may result from over-issue.

This was the experience with the paper money issued during the Civil War.  The exigencies of the Government called it out regardless of, and in excess of, the demands of commerce, and it depreciated from this cause as well as from its limited legal tender.  The depreciation worked a hardship to all creditors, and when bonds were subsequently issued to contract it or take it up its appreciation worked a corresponding hardship to all debtors.

Had the war been financed by the issue of "coinable" bonds in the first place, no inflation could have occurred.  The bonds would have been issued only in response to expanding trade.  The bonds would have disappeared as the notes appeared, and we would have arrived at the same place (reduced bonded debt) without inflation beyond demand or the subsequent arbitrary contraction that ruined so many debtors.

Through the operation of this plan the principles involved in the free coinage of gold are as fully met as they would be if the opportunity to mine gold was easy of access and unlimited in extent, but still involving an adequate sacrifice of time and labor;  for in such case, a tendency to loss of price that would check general industry, would simply and easily transfer labor to gold mining, and involve no congestion of the labor market.  The automatic and efficient check upon the undue increase of money in either case would be the full employment of labor, and that is the great desideratum.  Fully employed men means free men and nothing else does.  Fully employed labor will insure equitable wages and disband unions, and nothing else will.  Continuously employed capital will insure steady dividends in needed industry and render trusts unnecessary, and nothing else will.

As to the first proposition, fixing the percentage of reserves, I think that enough has been said to justify an arbitrary rule upon the banks collectively to maintain a safe per cent of cash against deposits.  We have also seen that the loss of revenue to the banks is inconsiderable, and if we follow the plan to its final conclusion we will discover that a large expansion of legitimate credit can be safely made without increasing capital or surplus at all, and that the gross revenue of the banks would be largely increased instead of decreased, and that an increased per cent of profit on the money invested by the bankers would certainly follow, unless competition would lower the discount rate to borrowers.  Competition behind the bank counter as well as in front of it is a consummation devoutly to be wished.

As to the second proposition, we would say that the local bank in any community is alone competent to determine the necessity for, or the value of, the assets offered to secure credit in the locality where it exists and should be empowered to respond to such demands upon its own initiative.  If any local bank discounts paper upon inadequate security, it should be compelled to suffer the consequences of its own folly, and an "espionage" of all "qualified" banks that will periodically reveal their condition is in the interest of the general public.

General supervision for the benefit of the public is the only combination of alliance that should be permitted among banks.  It is just as important that full and free competition should exist among the banks as it is elsewhere.  Twenty-five thousand three hundred competing banks is the safeguard of business against extortionate rates.

As to the third proposition, we would say that the evils resulting from the shifting of the reserve funds from one bank that does not make public its condition to another that does, are but practically understood.  It is doubtless true that a smaller basis of working cash is required in a country bank than in the cities and large commercial centers;  but having determined the percentage necessary in any given case, we should insist that the local bank should hold its own reserve.  The present method is deceptive and indefensible.

The fourth proposition contains two elements:  The retirement of Government bonds and the issue of full legal-tender paper money in their stead.

The national banks now have the privilege of hypothecating Government bonds and receiving an equivalent in national-bank notes.  This, as between the banks and the Government, is exactly similar to the transactions between ordinary borrowers and the banks.  Citizen A has a factory devoted to the production of some form of wealth and needs "currency" with which to operate it.  The bank discounts his paper, taking, directly or indirectly, the factory as security.  By this means a credit is established that circulated as currency, but it is not money;  the essential difference (in its origin) being that the "factory" that sustains the credit is still in use in the hands of the borrower, while legal-tender money can only appear in use when an equivalent of other property disappears from use, as in the case of the coinage of gold.

The bank note is a "credit" issued by the Government to the bank and secured by bonds "hypothecated," but still the property of the bank and "in use," or earning interest for the bank.  This puts the Government into the banking business with the banks as its only customer.

Under the original laws only Government bonds were accepted, most of them bearing only 2 per cent interest, and by floating credit upon them at one-half per cent interest (or tax) the banks can afford to hold them.  If these bonds were not thus privileged they would depreciate.  The reservation to the banks alone of this privilege of borrowing money from Government or using the Government credit for practically nothing is putting the banks into the governing business with a vengeance.

The Aldrich central-bank scheme is made attractive to bankers by indirectly extending this privilege to the hypothecation of the 6 per cent notes of individuals as security for bank notes.  Since there is no automatic check upon the issue of notes by this process, it can not be seriously considered, even if the injustice of it is ignored.  The notes of a central bank can serve no useful purpose unless they are made a legal tender, and, as we have clearly shown, legal tender can only issue through the sacrifice of an equivalent, and this process does not involve a sacrifice at all.

If securities bearing a higher rate of interest than 2 per cent are made available, the 2 per cent bonds must fall in price to a lower level than British consols.

Our proposition is to "retire" the Government bonds that are now "hypothecated" as security for bank notes and solve the 2 per cent bond problem at once and retire with them as many other bonds as necessary, and by issuing full legal tender money for them take the Government entirely out of the banking business, and by replacing the bank notes with Government notes put the banks entirely out of the governing business.

The Government should issue all the money used in the country.  Money is a community instrument, and whatever profit or loss is involved in its creation should revert to the community.  The banks should confine their activities to circulating credit.  Circulating credit is a private instrument, and whatever profit or loss is involved in its use should revert to the individuals that create it.

The fifth proposition requires the most careful consideration, and we remark first that it requires the creation of no new machinery.  The agencies that now handle the currency will be more than sufficient to handle the new.  No more high officials with fat salaries and discretionary powers are desirable;  our currency is sufficiently costly already.  The Bureau of Engraving and Printing, the department that now redeems the coin certificates, the United States notes and the bank notes, and the mints that coin our gold and fractional silver, are all and more than we would need.  A marvelous economy would be realized by the simplification involved in making all our paper money uniform.

We propose that all our paper money shall be full legal tender for all debts, public and private, in the United States.  This will entirely remove the necessity for gold or any other coin or coin certificate for domestic use.  Any debt, duties on imports included, could be paid with any piece of money of metal or paper that circulated in the Nation, and all the money that came into the bank could be held in reserve.

That our people prefer paper money to metallic money is manifest by the fact that the total money in circulation is as follows:

Paper:
Gold certificates ....................... $802,745,199
Silver certificates ........................ 478,597,238
United States notes ..................... 338,450,000
Bank notes ............................. 675,632,505
Total paper ............................ 2,295,425,002
Metallic:
Gold coin ............................... 590,877,993
Silver dollars ............................ 58,061,145
Fractional silver ............................. 150,000,000
Total metallic .......................... 798,939,138
In banks ............................... 300,000,000
In hands of the people ............................ 498,939,138
Fractional sliver ............................ 150,000,000
...................................... 348,939,138

We see from this that only $348,939,138 of coin other than fractional silver is held by the people, or 15 per cent of the entire circulation and 17 per cent of the entire amount outside of the banks, and this from voluntary choice.

If all the paper was full legal tender, the necessity for holding coin would be entirely removed and less instead of more would be held.

We propose redemption on demand in gold for every dollar extant, so that every paper dollar would be a gold certificate to all intents and purposes;  but, by reason of the full legal tender quality of the paper, redemption would never be sought except for curiosity or to settle foreign balances.

The figures here given are from the comptroller's report of 1910.  Against the total paper now in circulation ($2,584,000,000) there is now in the Treasury $1,207,464,000 of gold, which is $690,000,000 in excess of a 20 per cent reserve for redemption purposes.  If we add the gold held by the banks and by the people to that in the Treasury, we find a stock of $1,252,000,000 available for redemption purposes, or 70 per cent of the entire paper currency.  If the banks can safely float their credit, which is not a legal tender, upon a 15 per cent basis of cash ---and they can--- surely, the Government can float its credit, which is a legal tender, upon a 20 per cent basis;  and with 50 to 70 per cent to start with and a constant inflow from the balance of trade with the world and a yearly home production of $100,000,000 there can be no possible question that the reserve would constantly increase, while an expansion of bank credit in sufficient volume to safely maintain business in full activity can be constantly supplied.

This method, by making a more economical use of gold, promises the only safe and sure maintenance of the gold standard throughout the world, and at the same time insures a prompt and safe response to any demand for expanding credit that may be made by idle capital and labor.

The first effect of it would be the cancellation of practically all the interest-bearing debt of the United States and substituting therefor an equivalent increase in demand-obligations bearing no interest.  This will effect a saving of $21,000,000 per year in the interest charge.  This will cover many times over the cost of the transition.  But if by any possible stretch of the imagination we can conceive of a balance of trade setting in against us that would take gold out of the country at a rate three times as fast as the average export for the last 50 years, which included the war period (say, $25,000,000 per year), we could stand it for 25 years before our reserves would fall to 20 per cent, even though we ceased to produce gold in this country entirely.

As to the sixth proposition, we remark that assuming that the exports of gold rose and continued until our stock was reduced to 20 per cent of the paper currency, the sale of bonds would have saved $400,000,000 in interest and could out-bid any country on Earth, if necessary, to get gold.  We mention a 3 per cent bond simply for the purpose of fixing a rate approximating the commercial rate of interest for gilt-edged securities.  If the rate rose or fell, the bonds would fall below or go above par, as the case might be, but as long as the Nation exists and gold continues in the world we can get it.

As to the seventh proposition, we remark that an opportunity must be given to all who wish to exchange certificates for gold to do so;  and if the people prefer to take the gold, and do take all of it, a sale of bonds must be made to establish the reserve fund of 20 per cent against all the remaining notes;  and since no further issue of notes can occur, except in exchange for gold coin or bonds, no further issue of bonds would follow, and no change in the volume of money could occur, except by decreasing the bond issue.  The total issue of bonds required would be $20,000,000, provided all the gold was withdrawn by presenting certificates.  If only $20,000,000 of gold certificates failed to be presented, no bonds would be required.  There is no reason to suppose that any certificates would be presented, except to get gold for export.  The people prefer paper for domestic purposes.  They do not want, and would not use, gold for home circulation.

As to the eighth proposition, we remark that the depositing of Government funds in favored banks without interest is an evil that ought to be remedied.  When the security demanded in every case is the same, there is no reason why the deposit should not go where it is most needed.  The greatest need will be indicated by the highest rate of interest offered.  The money will finally reach that spot any way, and give a rake-off to the bank that first received it.

While treasurer of the State of Pennsylvania I had large sums of money deposited in the various banks of the State.  The interest rate was fixed by law at 2 per cent, and there was nothing but the importunity of the bankers to indicate where the money was most needed, and he reluctantly followed his best judgment in distributing the deposits at the uniform rate of 2 per cent, and upon the security prescribed by law.  Competitive bids would have at once revealed where the need was greatest and netted a considerable revenue to the State.  The arbitrary placing of Government funds without interest, or at a rate lower than competition sets up, is monopolistic in principle, and in no case necessary or advisable.

The hoarding of funds in the Treasury vaults at times of plethoric revenue takes money out of circulation and affects business.  Since our purpose is to take the Government out of the banking business, Government officials should use the banks as other interests do.

As to the ninth and last proposition we can not be too emphatic.  The tendency to monopolistic control of credits must be resisted with all the power of the state.  The proposed plan of Mr. Aldrich and his "commission," by which the control of the currency is to be placed in the hands of a central bank, has absolutely nothing to commend it.  The details of the plan have not been submitted with sufficient candor to make complete criticism of it possible, but in a general way it seems to imitate the method of the Bank of England, the advantage of which, if it has any over the American system, lies in the power of the bank to arbitrarily raise the discount rate and thereby prevent an expansion of credit before the danger line is reached and thus avoid panics.  This method involves a perpetual restraint upon business activity, regardless of whether labor is fully employed or not;  and the condition of labor in the territory over which the Bank of England holds sway is by no means reassuring.  Conditions are no better there than they are here.

What we want is a system that will remove the restraints upon industry and guarantee the safe conduct of general business at the highest point of productive speed and efficiency;  and a full and free competition among the banks in furnishing credit is as essential to this as is competition among those who use credit.  Premeditated monopoly is a conspiracy against society and should be punished as a crime wherever it exists.

Monopolistic control established by law is no less baneful.  Law (crystallized public opinion) should be invoked to prevent monopoly, not to establish it.

Through the operation of this plan all the gold offered for coinage comes into circulation.  If it should come in sufficient quantity to keep up the 15 per cent reserve, no paper money would be issued, for there is no inducement to issue it except for reserve purposes, so that there can be no surplus of money except from the coinage of gold.  This can and must be prevented, if gold should become too abundant, by legislation demonetizing gold.

The coinage of bonds will insure an automatic adjustment of money to demand, whether gold is denied free coinage or not, and furnish continuously a safe basis for all the credit we need.  When the paper is issued, and seven or eight times its volume of credit is issued upon it, it can not return for redemption unless the credit is withdrawn;  and since credit is constantly expanding (see table), it would never return except when gold was wanted for export.

Credit is a private instrument created for an individual by a bank for a consideration (interest), and the cost of carrying it compels its limitation in volume to the opportunities for its profitable use.  No man would borrow money from a bank (on good security) and pay interest upon it unless he can use it in some profitable way, so that the demand for credit can only arise out of an opportunity to use it in some profitable way.  If there are unused natural resources and idle labor, the owners of non-liquid capital will see an opportunity to profitably use credit.  Unused natural resources infinitely abound;  unpledged non-liquid capital also exists in large quantities, so that the final limiting factor is labor.

Legitimate, well-secured credit can not expand beyond the point when all who wish to work are employed.  In such case the workman must be receiving all that his work is worth to the employer, and a scale of minimum profits will be established that will prevent a new employer from hiring him away from the old one.

The full employment of labor, therefore, must be a final automatic check upon the demand for expanding credit.  The cessation of demand for additional credit is the final automatic check upon the issue of legal-tender paper money.  The full employment of labor is also the final check upon the mining of gold, and the full employment of labor, therefore, will be, and ought to be, the only check upon the production of all forms of wealth.

The full employment of labor is now prevented by the fact that the currency does not, and can not under existing laws, expand with sufficient rapidity to sustain the price of the permanent forms of wealth when they are freely produced.  The reason why a loss of price for these forms of wealth can not be endured is in that they are hypothecated as security for debt, and the loss pf price spells bankruptcy for their owners.

The production of these permanent forms of wealth affords the only unlimited opportunity for the employment of labor, since they alone can be owned and enjoyed in practically unlimited quantities.  The debts of the world rest upon labor, past or future, and can only be paid by the surrender of existing wealth or the creation of new wealth by the efforts of labor.

Vast multitudes of men have no asset save their labor, and if denied the opportunity to use it beyond the mere necessities of existence, debts must continue to increase and perpetual slavery of the people to the debt owners of the world is inevitable.

I thank you very kindly, gentlemen, for your attention.

Statement of Mr. William W. Flannagan.

The Chairman:  Mr. Flannagan, you understand that this is a subcommittee of the Committee on Banking and Currency of the House of Representatives, charged with the business of making investigation and getting advice and reporting a measure of currency reform, and we have invited you here as a practical man of long experience in the banking business, and would be glad to have you proceed in your own way.

Mr. Flannagan.  Mr. Chairman and gentlemen, I suppose you gentlemen in considering the difficult task which has been assigned to you have been struck, in the discussion which you have heard, with the importance given to effects ---defects they are called--- of our banking and currency system.  That these defects exist there can be no doubt, but I should like to direct your attention rather to the consideration of causes, if they can be discovered, so that your judgment may be utilized as to the best method of removing the causes without interfering with the business interests of the country and retarding the prosperity which has grown up in spite of these defects.

I want to talk from the standpoint of a practical business man and bank officer of many years' experience, first in the country and afterwards in the city, so as to direct your attention toward practical remedies as affecting the mechanism of banking rather than to generalities or theories in economics as applied to business.

If you will analyze any or all of the defects of our financial system, I believe you will find the cause can be traced to unwise legislation in the past.  I say unwise from an economic standpoint, for the legislation may have been, and probably was, a temporary necessity.  The cause as evidenced in legislation may thus be stated:

1.  The destruction of the bank function of circulation.

2.  The assumption that a statute law can make a promise of payment equivalent to payment or, in other words, make a debt equivalent to coin.

The want of elasticity in our currency, the lack of reserves in times of panic, the suspension of solvent banks, the absence of normal banking facilities for moving the crops, the undesirable accumulation of idle funds in the business centers, and the speculative excesses of Wall Street can all be traced to this cause.

There is much confusion of thought in the public mind concerning banking and banking terms, and we must be sure that such terms convey the same thought to our minds if we would apply our judgment in reaching conclusions.  The terms "deposit," "money," and "credit" are so loosely used that I believe you will find it necessary to conduct a campaign of education in order that the general public may understand the reasons of and the benefits to be derived from whatever legislation you may determine to be for the general good.

All banking, everywhere, is the dealing principally in debts, the substitute of a promise of payment for payment itself, and the different banking systems of the world are only variations of the methods whereby "credit instruments" or debts, may be legally substituted for coin.

Banking is an evolution or growth from the necessities arising out of the interchange of human wants, called trade or commerce.  Its essential functions are known as "discount," "deposit," and "circulation," all being an exchange of debts.  These necessities produce a higher law than legislators can enact, and when the statute law conflicts with this higher law, the statute is evaded, or necessity [the banks] forces its repeal.

The mechanism of banking may thus be stated.  The debt of the banks is accepted by the people as a substitute for coin.  This bank-debt is made available for the purposes of trade by being exchanged for the debt of the customer, through the function of "discount."  When the debt is evidenced as a "deposit," it is utilized through the medium of checks.  When the debt is evidenced by a "circulating note," it is utilized by delivery without recourse.  But we have so restricted its use in the form of a circulating note that we have forced an abnormal increase of the debt in the form of deposits, so that when the necessity arises through trade demands to exchange one form of debt into the other, our machinery fails.

I have stated as a cause of our financial ills the destruction of the bank function of circulation or note issue.  Such function does not exist with us to-day, and has not existed since it was prohibited by the 10 per cent tax imposed by the national-bank act.  The present bank-note currency is an issuance of notes to pay for the Government bonds it represents; the bank borrows from the public the amount of the loan to the Government.  It does not come into being in response to a commercial demand, and hence can not adjust itself in volume to such demand.  It is only used as an adjunct to settle differences in the transfer of deposits, where checks are not available.

The great mass of the circulating medium of the country is bank-deposits, these being bank-debts that circulate as a substitute for coin, through the instrumentality of checks.  This form of bank debt is ideal as to flexibility or elasticity, above $550,000,000 of these debts being daily swapped or exchanged among the banks themselves through their clearing houses.  But the other form of "bank-debt-substitutes-for-coin," the circulating note, which the necessity of industry demands, can not be had unless a Government bond be first purchased.  Thus the bank is deprived of the note-issue function, and trade must suffer in consequence.  One of its effects is seen in the suspension of solvent banks, an anomaly peculiar and exclusive to this country.

It should be borne in mind that the restoration of the banking function of note issue is not wanted for the profit of the banks, but for the benefit of the people, by enabling the banks to carry on their ordinary business under normal conditions.

If banks are allowed to issue notes against 50 per cent gold reserve, requiring a sufficient amount of this reserve to be kept with the United States Treasurer to redeem the issue on presentation, we shall have an elastic bank currency which will come into being in response to trade demands and which will be redeemed when its function has been performed.  By having one place of redemption it will circulate at par everywhere, and the volume which may be issued can be limited by the banks' capital, or capital and surplus.  The Comptroller of the Currency should control the printing and delivery to the banks as now.  The redemption at the Treasury will practically constitute a clearing house for bank debts represented by circulating notes, and elasticity will be secured by banks sending other banks' notes to the Treasury for redemption in order to maintain their own gold reserve.  This practically amounts to allowing banks to issue circulating notes against assets to the extent of 50 per cent of their capital, or capital and surplus, as may be determined.  On the basis of 6 per cent interest this circulation will give the banks 3 per cent profit, less taxes, on such notes as may be kept outstanding, which is about 1 per cent better than the profit arising from the present circulation.

If this procedure should be adopted, the next question is:  'What will you do about the present bond-secured notes ?'  There seems to be a general consensus of opinion that a bond-secured currency can never be responsive to the demands of trade, and its many ill effects have so often been pointed out that I deem it unnecessary to call further attention to them.  There are outstanding $730,000,000 of 2 per cent bonds, of which six hundred and eighty-four millions are deposited with the Treasury as security for bank notes and fourteen millions as security for deposits, making a total of six hundred and ninety-eight millions, leaving only about thirty-two millions held outside of the Treasury.

Without the note privilege, these bonds would command in the market a much less price than par, and you can not consider removing this privilege as an isolated proposition, with the accompanying loss of the banks, in view of the fact that they were practically forced to purchase them.

The debt represented by these bonds is now carried by the public.  The banks do not carry the debt;  they are merely intermediaries.  The public, which holds the bank notes, is the creditor, and it is willing to continue as such creditor.

My suggestion is that the difficulty may be solved by allowing the substitution of certificates of deposit in the form and denomination of circulating notes, not bearing interest, to be made at the will of the holder, for the 2 per cent Government debt outstanding;  this privilege not to be confined to national banks, but to be available to State banks, to trust companies, to everybody, and then allowing these certificates to be reconvertible into the same bonds at the will of the holder, so that whenever redundant they can be exchanged into an interest-bearing obligation.  Let these certificates be receivable for all taxes and demands due the Government, as the national-bank notes now are, and be reissuable.  Let them not be made a legal tender and not be available as a legal reserve for banks.  Then you will have one form of Government currency which is elastic and responsive to business demands and have the Government acting as bailee only in all the forms of money it issues, viz, certificates, for gold, for silver, and for bonds.

If you will allow banks to issue notes to the extent of their capital against a gold reserve of 50 per cent, or against United States bonds, and at the same time authorize these interchangeable bonds, you will find the national-bank notes now outstanding will be gradually replaced by the bond-currency certificates.  The banks, in order to avail of the function of note issue, will surrender their bonds for certificates and cancel a corresponding amount of their outstanding notes.  As nearly all of the 2 per cent bonds outstanding are now deposited with the Treasury, such bonds are not available for substitution into currency certificates without a corresponding cancellation of present bank notes.  Hence the total volume of the circulation can not be increased by means of the interchangeable bond;  it may be increased only by a bank issuance against a gold-coin reserve of 50 per cent and current assets of the other 50 per cent.  Thus the banks are saved any loss, and at the same time can utilize the bank function of circulation as trade demands require.  We then shall have this Government currency regulated in volume by the business interests, and a bank currency responsive to the demands of trade capable of meeting its necessities under all normal conditions.

We must, however, provide the means of utilizing a reserve credit to meet extraordinary and abnormal disturbances in times of financial trouble and panic.  Overtrading and speculation, as the result of weak human nature, nearly always follow periods of great prosperity, and though we may provide all the safeguards which human capacity can foresee, these periods of commercial distress seem to be inseparable from human frailty.

It is a well-known principle in banking that in every commercial crisis some source must exist from which undoubted credit can issue, that financial disaster may not follow;  or as sometimes expressed, "credit must be expanded, not contracted, in times of panic."  Credit should be understood here as meaning the ability to incur debt, or the confidence which enables debt to exist.  Credit is always the co-ordinate of debt, and can not come into being unless debt is simultaneously created.

The issuance of clearing-house certificates is an application of the principle of reserve credit.  Unfortunately for us, such issuance is of doubtful legality:  and being so, we have had panics under which the remedy was forced by necessity, instead of having it applied as a preventive.

The act of May 30. 1908, [Aldrich-Vreeland Act] authorizing the consolidation of banks into national currency associations, legalized in effect what had theretofore been forced by the necessities of the case, and allows banks to consolidate assets and issue a joint debt in the form of a circulating note.  This is practically a clearing-house certificate, and from our experience with this form of bank indebtedness we may feel confident it will serve the purpose for which it is intended and be used in times of financial disturbance to allay distrust, and better still, to prevent panics when they threaten.

Under the provision of this law, 18 national currency associations have been formed, consisting of 296 banks, with an aggregate capital and surplus of over $575,000,000.  With some slight changes in this law, removing the condition precedent for bond-secured circulation and reducing the prohibitive tax on note issues, it can be continued in force, and will amply provide a reserve credit available to meet all emergencies.

I should like to see this act further amended so as to provide for the issuance of certificates of indebtedness bearing 6 per cent interest receivable in settlement of clearing-house debit balances as between the associate members, and allowed to be temporarily counted as "legal reserves."  This will enable the banks to utilize their joint assets among themselves, before resorting to the public for their reserve credit.

I have stated a part of the cause of our financial ills to be legislation which assumes that a debt can be thereby converted into the equivalent of coin.  We have in our banking laws two exemplifications of this false assumption.

1.  Making United States notes (greenbacks) a legal tender for all debts, and a so-called "legal reserve" for bank debts.

2.  Allowing banks to count debts due from other banks located in so-called reserve cities as a part of their required "legal reserve."

I approach the subject of the greenback almost with awe, as I know the sanctity with which it is sometimes spoken of as the preserver of the Union;  the more so, as I was a rebel (though a mere boy) who fought in Lee's army.  But in this connection I had impressed upon me so forcibly what a money reserve is that I have never forgotten the lesson.  My father, who was a banker, in equipping me for the army furnished me abundantly of the so-called money of that time and place, some Confederate money, and what he considered a little better, some Virginia treasury notes.  But he gave me in addition a $5 gold piece, of which he said.  "This is your reserve, my boy.  Take good care of it, for it may serve you a good turn."  His words were prophetic, and to this day I have not forgotten that "reserve money" means gold.

In all monetary legislation we should remember that there are certain fixed, unalterable customs of trade which have all the force of universal law.  These have grown out of the experiences of mankind in its commercial relations, and statute law can not control them.

Statutory law is limited in its jurisdiction, while commercial jurisprudence is universal.  Hence, when we attempt to make any promise of payment equivalent to payment, we only enact a "stay" law applicable to ourselves.  The expediency of "stay laws" has sometimes been thought to be so pressing as to be a necessity.  The necessity for making greenbacks a legal tender may have existed, but no one can question the assertion that such necessity does not exist to-day.  We had brought home to us in 1893 the fact that our attempt to make our paper promise to pay gold the equivalent of gold was a failure.  We were forced to follow the higher law and provide an ample gold reserve fund, pledging ourselves that this reserve should be held inviolate as a trust for the redemption of the promise.

The effect of the continuance of this fiction has been to substitute as the reserves for our bank indebtedness this Government debt instead of gold.  All the world concedes gold is the only proper reserve money.  In point of fact, reserve to pay debts must necessarily be the money which finally discharges and cancels debt;  and this is metallic money only, into which the element of debt does not enter.  All other payments are but the interchange or substitution of debts.

This fiction caused the "greenback heresy," which might have resulted in the destruction of our financial supremacy, and it continues in the minds of men a fallacy which may yet lead to a renewal of the battle for sound money.  The fiction to-day is exemplified by the United States Treasury counting its own debt as an asset.  In the daily statement issued by the Secretary there are added together United States notes (greenbacks), gold, and silver certificates and gold coin, to make the total of the "general fund."  If any one of us should make out for a creditor a financial statement of our condition and add our own debt as a part of our assets, I think we should have a fair chance of landing in jail.  I only mention this latter to show an absurdity into which we are led by this attempt to legislate that debt is equivalent to coin.

My suggestion is that you incorporate into the law which you may formulate a provision allowing greenbacks to be funded into bonds;  not requiring it, but only acknowledging the indebtedness and giving the holder the opportunity to receive interest thereon if he so elects.

You will remember that at one time it was determined to pay off this debt;  but, owing to the destruction of the bank function of note issue, it was found that the cancellation of these notes made such a deficiency in the volume of the circulation that we had the bank suspensions of 1873, and we fixed the limit of this indebtedness at $346,000,000.

In order that there may be no forced reduction in volume of the circulating medium by reason of the retirement of greenbacks, if you will allow them to be converted into the interchangeable bonds suggested, this difficulty will be removed, and you will provide an elastic Government currency to the extent that greenbacks are voluntarily surrendered.

The second exemplification of the false assumption that legislation can make debt equivalent to coin, viz, allowing country banks to count the debt due from reserve city banks as a part of their legal reserve, is the most pernicious in its results.

It seems to me that Mr. Chase, in drawing the national bank act, must have misplaced confidence in some interested bank official when this provision of the law was inserted.  He knew the essential requisite of a bank reserve, for he provided that national bank notes should not be counted as such reserve, realizing that this represented only the bank's debt.  But, strangely enough, he made a distinction between a country bank's debt and a city bank's debt, allowing the latter, when in the form of a deposit, to be considered as a reserve for the country bank.  The idea must have been that as the circulating note of the country bank was originally made redeemable at the counter of the reserve agent in the city, it would be necessary for the country bank to keep a considerable proportion of its reserves with the city bank for this purpose, losing sight of the fact that when this reserve was kept in the form of a deposit it was converted into a debt.  When the law was modified so as to require redemption of circulating notes only at the Treasury no change was made in this provision as to reserve;  and hence it remains to-day that "due from reserve agents" is a debt which the country banks can consider a "legal reserve" or "equivalent to coin."  Reserve agents represent a bygone fiction and have no function other than that of any other bank correspondents.  "Due from banks," whether reserve agents or not, should represent in a country bank's assets only a sufficient amount to meet the requirements of its customers in the way of exchange or transfer of funds from one place to another.

Under this provision a bank, which, of course, could not count its own note or debt or the note of another bank as a reserve, can send such note to its reserve agent as a deposit, and then such debt from the reserve agent becomes under the law a "legal reserve."

One effect of this procedure, which the law never contemplated, is to reduce the total volume of required legal reserve for bank deposits.  The country bank is required to keep 15 per cent reserve and the reserve city bank 25 per cent reserve.  On $100,000 deposits the country bank should have somewhere $15,000 in coin or greenbacks.  If it sends $15,000 in currency, or even secures a discount from its reserve agent, so as to get a deposit credit of $15,000, the requirement for this reserve coin no longer exists, as the bank then calls this $15,000 " due from reserve agents," which is under the law made a " legal reserve."  The reserve agent has a debt of $15,000, on which it must keep a reserve of 25 per cent ---say, $3,750.  The deposit liabilities of both banks amount to $115,000;  and the intent of the legislators must have been that the reserve should be $18,750, but it, in fact, is only $3,750, or 8 per cent.  This is certainly an undesirable species of inflation.

Another effect is that it accumulates in the reserve centers a most undesirable form of bank indebtedness.  The inelasticity of our currency produces a volume of bank indebtedness which must be carried in the form of bank notes, whether wanted in the channels of trade or not, because such notes represent the Government debt.  When redundant the country banks send these notes to the city banks for credit as a deposit.  They do so because of the interest allowed them and because the debt counts as "legal reserve."  The city bank finds its deposits in the form of "due to banks" largely increased and must find some source to recoup itself for the interest it is paying.  It is not a deposit which can be used in the ordinary channels of trade.  As a matter of fact, deposits made by banks in other banks do not represent the true bank function of deposits.  It is a debt which the city bank must keep always promptly available.

From this condition grows stock-collateral call loans, the tremendous variation in rates of interest, and the rapid rise and fall caused thereby in the prices of securities.

The repeal of the law allowing banks to carry other bank debts as a part of their legal reserve will surely tend to curb the speculative excesses of Wall Street.  This cumulation of so-called reserve for country banks has been demonstrated time and again not to be a proper reserve because not always available in time of need.  Let banks keep their reserves at home in coin, and we shall surely have fewer panics and certainly no outcry in times of panic against New York City banks being unable to pay their debts and Wall Street ruining the country by its gambling propensities.

I have directed your attention to the cause of our monetary troubles in so far as produced by legislation, and to the remedial legislation which I consider essential to our continued national prosperity and development.  That is---

1.  Restore the bank function of note issue, to be based on a gold reserve and assets, and as a practical means thereto authorize the interchangeable feature as to 2 per cent bonds.

2.  Abolish the fiction of "legal" reserve by allowing the exchange of greenbacks into such bonds, and by repealing the law which permits debts of so-called reserve banks to be counted as any part of the reserve of other banks.

3.  Continue the benefits to be derived from the law of May 30, 1908, by repealing the provision requiring a bond-secured currency issue as a condition precedent, and also the prohibitory tax therein on circulating notes.

There are some other suggestions, which I do not regard as essential, though highly beneficial and advantageous, which may commend themselves to you upon proper investigation.

Among them I would mention---

1.  Allow banks of a fixed minimum capital to establish branches in foreign countries.  Corporate powers of these banks should be extended to include the issuance of commercial letters of credit and, incident thereto, the acceptance of time obligations, which are a necessary requisite of foreign trade.

2.  Limit the maximum of indebtedness of every bank in some proportion to its capital and surplus.  Capital and surplus is the margin of security which banks give the public for their indebtedness, and such indebtedness should be limited in proportion to the security offered, as in every other financial transaction.

3.  Limit the amount of the circulation which may be withdrawn from the channels of trade through the operations of the Treasury by fixing the maximum amount available working balance beyond which any excess shall be deposited with the banks at interest, the rate to be determined by competitive bids.

4.  It would be most desirable to have bank debts, in the form of deposits, circulated through the medium of checks at par everywhere, as bank notes now do.  If the clearing-house associations of the three central reserve cities would select one as a central clearing house, and each become a member thereof, allowing the same privilege to the clearing-house association of any other reserve city, we should have this uniformity of deposits.  This desideratum might be brought about by prohibiting banks from making any charge for exchange or transfer, so that checks on other places than the place of deposit, if refused as a "cash item" on account of "time to collect," would have to be received as a "collection item" free of cost, or as "bills discounted" instead of "due from banks" as now;  the latter item is now deducted from liabilities in computing the required legal reserve.  The subtreasurer makes transfer for banks now without charge, and there is no good reason why banks should not do likewise.  I know of no general agreement among banks to make such charge except in New York City, and few other banks do.

I think you are pledged not to recommend a central bank as the remedy for our ills, no matter what its name may be, and I am glad it is so.  I have several times read Mr. Aldrich's argument, made in connection with the report of the Monetary Commission, and I am not convinced thereby, but am more strongly confirmed in the view that the whole project is entirely antagonistic to our theory of self-government.

It matters not by what complicated process the administrators of the proposed bank may be selected, the question is the power it can exercise when organized.  We may select our administrators of the law, our president, and our judges by popular vote, but if we clothe them with the power to abolish the trial by jury or the writ of habeas corpus we endanger our liberties.  In a similar way, if we give one corporation the exclusive right to issue circulating notes, we give it the power to dictate the amount which shall be used in this form by the people as a substitute for coin, or, in popular language, "the sovereign right to issue money."  We destroy the separate units of our banking system as independent organizations, and under the plea that the new corporation is their creature, we constitute a monopoly which can crush and destroy any one of them.

Suppose the proposition was made to constitute the National City Bank of New York or the First National Bank of Chicago as the reserve agent of all other banks, give it the exclusive right to issue notes, allow such notes to be counted as reserve of other banks, and require every other bank to invest 20 per cent of its capital in the stock of this bank, on which the profits should be limited to 5 per cent, would it not be laughed out of court ?  It seems to me there is no material difference in results between this proposition and the one to organize the "National Reserve Association."  The fact that this New York or Chicago bank's customers are not confined to banks, can not destroy the similarity of the proposition.

Great stress in the arguments for the central bank is laid upon the desirability of the concentration of gold reserves;  the ability of such bank to apply a remedy for local financial trouble and to render assistance when and where needed.  I fail to see how the concentration of reserves under the control of one bank benefits the whole.  We do not need a fire department to blow out a match.  The amount of gold is not increased by its concentration at one place;  and how the separate banks can be benefited by counting the debt of the central bank as its reserve, instead of the gold itself, is beyond my comprehension.

Nor can I see how the country is benefited, or the security for the debt which circulates as money is increased, by having this indebtedness confined to one bank instead of many banks.  The margin of security, i.e. the capital of the National Reserve Association as proposed, will be $200,000,000, which may be increased to 20 per cent of the capital of the banks subscribing to its stock, while such security is now the present capital and surplus of the many banks, about two thousand million dollars.

Besides this, the National Reserve Association is unlimited as to the indebtedness it may contract in the form of circulating notes, except by the tax thereon, and the many banks are limited by the amount of their capital stock.

I should like to take up in detail each of the arguments for and the provisions of this Aldrich remedy, some of which provisions are very good, but I feel that I have already trespassed too much on your patience.

I have given much thought and study to the question of monetary reform, guided by many years' experience in banking and in mercantile pursuits, before and since the appointment of the monetary commission.  All of its publications were sent to me as issued, and I think it probable I have read a greater portion of them than any member of that commission.

I feel much honored that you gentlemen have asked me to express my views before you, and have given me sufficient of your time to hear them.  I shall be more than compensated if your consideration should direct your thoughts along the same line as my own, that I may have the satisfaction of feeling I have been of some service.  The solution of the momentous question under your charge affects the well-being of every man, woman, and child in our beloved country, and to serve you in finding its proper solution is worthy the ambition of any man.

The Chairman.  Do any of you gentlemen want to ask Mr. Flannagan any questions ?

Mr. Kindred.  Mr. Chairman, I would like to ask Mr. Flannagan one or two questions simply to clear up in my own mind his meaning.  Did I understand you correctly, Mr. Flannagan, as to your statement as to the basis for note issue of the banks, that it should be 50 per cent gold ?

Mr. Flannagan.  Yes.

Mr. Kindred.  And the other 50 per cent should be assets of the bank ---that is, the whole assets ?

Statement of Mr. George Blumenthal, of the firm of Lazard Freres, bankers, New York.

The Chairman [Carter Glass].  Mr. Blumenthal, this is a subcommittee of the Committee on Banking and Currency of the House of Representatives, charged with the investigation of banking and currency matters with a view to reporting at some time in the near future remedial legislation.  Senator O'Gorman, of New York, was kind enough to suggest your name to us, and we have invited you to come here to give your views and your advice on the subject as to what should be done.  You may make your statement in your own way.

Mr. Blumenthal.  Mr. Chairman, as you know, having looked into it, this is a very broad subject, and, of course, different people have different ideas.  I have had occasion to follow this whole currency question in the United States for a great many years, and ever since 1893 I might almost say my firm have been foremost in importations and exportations of gold, and have thereby come in contact with everybody who had anything to do with it, and I have become thoroughly familiar with it.

Mr. Taylor.  Have you a statement there as to the part that you have had in the importation of gold into the United States ?

Mr. Blumenthal.  No;  I have nothing at all on that, because it is not bearing upon the question.  My remarks are not based entirely upon imagination, but are developed from what I have seen.

I believe, Mr. Chairman, that it is a very risky thing for any country of the size of the United States ---of 90,000,000 of inhabitants, and with such enormous business interests--- to make a radical change in its monetary system.  I believe that our system, as far as it goes, has worked out in a general way reasonably well, and I believe that changes could be made without making a perfect revolution.

I also believe that this country could very safely substitute, for quite a large amount of the national-bank notes outstanding, United States bank notes, because to-day, perhaps because the credit of the United States and the stability of the United States are recognized, the national-bank notes are good.  The bank note, of course, is an obligation of the bank;  but, on the other hand, the Government is responsible for it and it is secured by Government bonds.  If it was not for the strength of the deposit, those notes would not have the same value in the minds of the people.  I can not see any objection whatever to the Government redeeming an amount equal to the outstanding national-bank notes and issuing its own notes, secured, certainly, partly in gold.

There is now outstanding $340,000,000 of greenbacks, against which there is a reserve of $150,000,000;  but the reserve of $150,000,000 is not only against greenbacks, but also against the large volume of silver certificates that is outstanding.  That amount I have not in mind now, but it is between $300,000,000 and $400,000,000, is it not ?

Mr. Levy.  Yes;  it is $500,000,000.

Mr. Blumenthal.  $500,000,000.  You can not consider the bullion as anything, because you could not sell it at half the value of the outstanding notes.  It is not worth half to-day.

The Government has also to take care of the bank notes when they come in, so that really the $150,000,000 to-day are the reserves of the Government against all that outstanding money.  The Government is absolutely responsible for every one of those issues, to redeem them in gold when they are presented.  Of course, the Government can collect of the banks afterwards and get its money back, except on the silver certificates where they have absolutely no way to get their money back.

An additional issue of currency should be made by the Government to bring the total amount to $1,500,000,000.  A part of this issue should be applied to redeem the $745,000,000 of United States bonds now deposited against bank-note circulation, and the proceeds of the sale of these bonds to the Government would furnish the national banks the funds to redeem their outstanding notes.

The amount of gold now in the hands of the Government and of the banks would easily permit you to set aside $350,000,000 in gold, making, with the $150,000,000 already held, a total reserve of $500,000,000, constituting a cash reserve of 33 per cent against the issue of $1,500,000,000 notes, which would seem fully adequate.

The United States bonds would practically all be redeemed.  I believe that the United States are fully good for the $1,000,000,000, and they would be good for $10,000,000,000.  But there would be no demand to redeem any of these notes.  Ever since the $150,000,000 has been set aside, there never has been a demand on the Government to use one dollar for redemption.  The only time that the Government was called upon to redeem notes it was not really called upon to redeem notes, but it was simply that the receipts of the Government were so far below the expenditures of the Government that every few months the Treasury was empty, and those people who were in favor of the gold standard, and who wanted some change in the monetary conditions, said that this was on account of the lack of gold.  It was not, at all.  If in those days the revenue of the United States had been large enough to always keep their drawers full of cash, there would have been no "endless chain."  What was called the endless chain operated in this way, that $100,000,000 of bonds was sold, and the money was in the Treasury, and it was paid out for expenses of the Army and for pensions, and all kind of expenses.  When that $100,000,000 was pretty nearly exhausted, there was no more money there, and they had to issue another $100,000,000 worth of bonds.  It was said that that was done to replenish the currency reserve, but it was not.

Mr. Bulkley.  You are proposing a fiat money, are you not ?

Mr. Blumenthal.  I propose an absolutely fiat money;  but, as I said before, I consider an absolute fiat money issued by the United States ---fiat only to the extent of two-thirds, and one-third secured by gold--- fully as safe as any money issued by banks on the basis of a United States obligation.  If the credit of the United States is not good, then the bonds of the United States are not good, and if the bonds of the United States are not good, then that money of the banks based upon the bonds of the Government is not good.

Mr. Bulkley.  But all the assets of the banks are behind that, also.

Mr. Blumenthal.  If the credit of the United States is not good, I would not give very much for the assets of the banks.  If the United States Treasury was not good, I think most of the banks would be bankrupt, and most of the individuals would be bankrupt.  There is only one way in which that condition could come about, and that would be in time of an unfortunate war;  and in time of an unfortunate war you know what every country does.  If there was a war with any of the great nations of Europe to-day the first thing would be to declare a moratorium, which would be saying that nobody need pay any debts up to the time that it was stated that the moratorium should end.

Mr. Taylor.  I understood you to say in answer to Mr. Bulkley that you advocated an absolutely fiat money.  Why do you want that $500,000,000 in gold ?  Why have a reserve of one-third in gold against your proposed issue of United States notes ?

Mr. Blumenthal.  Because a currency issued by the United States with a reserve of one-third gold I do not consider to be fiat money.  I consider it a very good money for circulation;  and at the same time, if some gold is wanted, you can pay it out.

Mr. Taylor.  Then the proposition that you have made of a currency issue of $1,500,000,000, with a reserve of one-third in gold, is not, as I just understood you to say, a proposition for fiat money.

Mr. Blumenthal.  It is a circulating medium based on part gold reserve.  You can not base it all on gold reserve, because there is not gold enough in the world.  I consider it an absolutely safe currency for the United States.  The United States has the same obligation to-day, with the issue of United States bank notes, that it would have then;  and if the United States issued this currency itself, it would make a saving of between $15,000,000 and $18,000,000 a year in interest.

The rapidly growing wealth of the United States is bringing with it a constant increase in the deposits in national banks, State banks, and trust companies.  An annual increase of $600,000,000 in such deposits is more likely to be an underestimate than an overestimate for the coming decade;  $600,000,000 additional deposits means about $100,000,000 additional requirements in gold and legal tender for reserve purposes, which is equivalent to drawing out of circulation that amount of money.  You will see in what I have to say afterwards why there is a tremendous advantage in the circulation and currency of the country, if you place United States notes in the place of national-bank notes, because the United States bank notes are legal tender and the national-bank notes are not legal tender.  Such a withdrawal is becoming more difficult, as the amount of circulating medium in this country does not keep pace with the requirements called for by increase in wealth and increase in population;  and, in fact, the volume of circulating medium should increase considerably from year to year to permit a smooth working of the financial machinery of the country.

A change in the present statutes which would involve a reduction in the reserves to be held by banks and trust companies, while in the opinion of some people desirable, does not seems practicable, and the only other avenue of relief and possibility of preventing serious trouble is to increase in one way or another the amount of money considered legal for all purposes.  The substitution of United States notes, which are legal tender, for United States bank notes, which are not legal tender, will add somewhat over $800,000,000 to the amount of legal-tender money available.  It makes a change from nonlegal to legal tender money, the amount itself not being increased.  Every bank note to-day is not legal tender.

The Chairman.  Does it not make another very radical change ?  Does it not substitute fiat money for bank notes which represent all of the assets of the banks and a double liability of the stockholders, and commercial transactions involving assets of the banks ?

Mr. Blumenthal.  It substitutes for one-third of the amount outright, gold, which is better than they have to-day, and for the other two-thirds it substitutes the credit of the Government.

The Chairman.  For the commercial transactions of the country.

Mr. Blumenthal.  Instead of those of the bank.  I think the country is just as safe with the one as with the other.  That is my feeling ---that it is just as safe.

The Chairman.  How does the Government get anything to redeem those credit notes ?

Mr. Blumenthal.  Those credit notes are so absolutely needed for circulation that they will never come in.  You could not take that money out of circulation.  But for the first $500,000,000 of it they would have gold there.

The Chairman.  Suppose we were going to have a war and the Government notes were to be depreciated and gold was to be at a premium;  do you not think those notes would have to be redeemed ?

Mr. Blumenthal.  I do not think they would have to be redeemed, because part of them you could redeem and the balance, I think, would stay out;  because, if you had an unfortunate war, the national-bank notes would also not be taken.  Whenever your United States bank notes would not be taken at par under the same conditions the national-bank notes would not be taken at par, for the Government is just as responsible for the redemption of the national-bank notes as it would be for the redemption of these United States bank notes.  If you had a war and people wanted gold for their bank notes, they would come to the United States Treasury and ask for the gold, and you would have to give it to them;  and if you do not give it you are just as much insolvent as if you do not give it for your own notes.  So your position would not be any worse than it is now.  The national banks can not give you gold, because they have not got it.

Mr. Blumenthal. I do not cut off the national-bank notes entirely.  You will need national-bank notes.  My idea is not that we shall not have national-bank notes, but I do not want national-bank notes secured by United States bonds.  I think as long as the credit of the United States is back of the bank notes, to that amount the Government itself can assume the responsibility, because it has it, anyhow.

Here is a point that I raised years ago before the Aldrich committee, but they said at that time that they would never listen to any such thing.  The issuing of gold certificates by the United States and the Treasury constituting itself a warehouse of gold, free of charge, seems to be a pernicious custom which was inaugurated when nobody could foresee that it would run into such amounts as it now has come to.  Over $1,000,000,000 of gold in the hands of the Government, held in trust against outstanding gold certificates, involves risks and responsibilities no Government should undertake.  I think the responsibility alone is sufficient reason not to have that gold;  but there is another reason, which comes afterwards, which shows you why it is a great mistake in the whole currency situation to have gold certificates out.

Much has been said in late years of the large production of gold and its influence on prices and the cost of living in general.  This is nothing but a fallacy, and has its basis in confounding increase of wealth and increase in the production gold.  The world's gold production is at present about $460,000,000.  Of this, not less than $200,000,000 is used in the arts and $100,000,000 goes to India, where it is hoarded mostly in the shape of small bars and is lost for all practical purposes.

Mr. McCreary.  That is, the world's production is $460,000,000 per annum ?

Mr. Blumenthal.  Yes.

Mr. McCreary.  That means new gold every year ?

Mr. Blumenthal.  Yes;  $200,000,000 of that is consumed in the arts, and I have explained before that $200,000,000 is rather below than above the true amount.  As to the $100,000,000 which it is estimated goes to India, there has been quite a controversy, and we have found that the average for the last 10 years has been $135,000,000 and not $100,000,000.

There remains, then, less than $200,000,000 of new gold, of which a very large amount goes yearly to Argentina and Brazil, leaving for all other countries of the world probably not much more and probably considerably less than $100,000,000 per year, an insignificant amount when compared to the increase in wealth and to the additional requirements caused by increased population in all civilized countries with the exception of France.

I suppose that does not need any further explanation.  In other words, it shows that in spite of what is said of there being a tremendous gold production, all that can be used for monetary purposes is considerably less than $100,000,000 a year.

The population is increasing in all these countries with the exception of France.  That means simply this:  You take this country.  It has 90,000,000 inhabitants.  You have here a per capita circulation of about $32.  The next year you have a million and a half more inhabitants.  You will need $32 per capita additional for those 1,500,000 new inhabitants.  You can not get your per capita down every time the population increases.  If you want to keep the same per capita in circulation you must add enough to keep up with the increase in population.  The same thing is true of Germany and England and all these other countries, which are all increasing in population except France, which is not increasing in population.

Since the gold standard has been established in the United States no financial uneasiness could properly be ascribed to fear as to the soundness of our currency, except during the period of the free-silver movement.  In the panic of 1907 it was simply a question of getting money, and anybody who wanted it, either banks or individuals, cared not whether they received gold certificates, greenbacks, silver certificates, or bank notes.  The only trouble was that there was not a sufficient supply of any one of those four tokens of money.

It is, of course, another fallacy when people believe that they can get money for the balances they have in banks.  Deposits in banks and trust companies of about $16,000,000,000 can not be paid in cash when there is only about 15 per cent cash to pay it with, and, as the number of people who have money in bank in this country is tremendously much larger than in any other country of the world, the attempt of some of them to get cash, for fear that later on they might not be able to get it, is followed by so many others that within a very brief period, a period of probably only a few days, sufficient cash has been drawn out to make it impossible for the banks thus depleted to replenish their reserves;  and as, under the present law, no bank having less than the reserve required by statute is allowed to make any new loans ---that is, to do any new business--- the business of the banks is bound to come to a standstill.

This explains what was mentioned by one of the gentlemen here as to the reasons for the panic of 1907.  Some people wanted cash.  They saw that some of the banks had not much cash.  They thought that in a little while there would be a great demand for cash, and they would not be able to get it.  There was absolutely no demand for the cash;  the banks of the far West did not need it, but they were afraid that the banks in the East could not give cash.  Certainly, they could not, because it was not there.  So the banks of California and Oregon took out all the money they could and got it in their own hands until they got their reserves up to 60 or 70 per cent.  When hysteria takes possession of people, in a few days there is no gold.  The people must be educated to understand that the money in bank does not mean cash, but that the money in bank means the privilege of the transfer of a certain amount to somebody else in payment to somebody else.  They must understand that if they do not put cash in the banks, they can not get it out, because it is not there.

There are at present carried in the pockets of the people of the United States sums of money unheard of in other countries, and a great part of it, if not the greater part, is in gold certificates.  If there were no gold certificates, they could not carry it in that form, and they certainly would not carry it in gold coin.

I want to dwell on this for a minute.  I do not know how it is in the South and the West;  but if you get any number of men together in New York and say to them, "Let us see how much money you have in your pockets," you will find that is true.  A few days ago there were three of us together, and one was Judge Gary, and some question came up about currency, and I said, "How much money have you in your pocket ?"  Judge Gary said, "I do not know;  somewhere between a thousand dollars and two thousand dollars."  I said, "Let us have a look at it."  He pulled out his pocketbook, and there on top were two or three gold certificates of $500 each.  This is another reason, and a strong reason, why you should not have any gold certificates in this country.  Why should you make it so easy for the "people to earn" this money, which is so scarce in the world around them ?

Mr. Kindred.  You do not mean to say that you think that is a common thing ?

Mr. Blumenthal.  It is a common thing for people to have from $100 to $500 in gold certificates in their pockets.  You see what I have here in my pocket [producing money].

Mr. Kindred.  But you are on a trip now.

Mr. Blumenthal.  I carry $200 or $300 always.

This is a very important thing as a reason why the Government should not issue gold certificates.  As it is now, you have these gold certificates scattered everywhere.  Currency, issued by the banks, should in time provide a much larger proportion of the circulating medium in the pockets of the people than it does now.

Now, this is additional circulation after the United States notes, and it is new circulation for the banks again.  Mind you, I do not mean at all that these figures should guide you in any way.  These are simply suggestions, and I have not attempted to frame any legislation.  All that I have attempted to do is to give a little information, as it may be in my power.

It would be perfectly safe to allow the national banks to issue, say, the first year 10 per cent of their capital and 5 per cent additional every year until it has reached 50 per cent, and then, perhaps, a smaller amount annually until the circulation comes up to the full capital of the national banks.  Such notes could be secured by deposits of two-thirds of their face value of savings-bank securities;  the character of such securities, however, to be approved by a committee of three or five, to have its domicile in Washington, and of which the Secretary of the Treasury should be one, and under necessary safe-guards as to the character and proportion of securities to be accepted.  One-third of these notes should be covered by a reserve of either gold or legal-tender money, and a tax of not less than 1 per cent on all the outstanding notes should be levied by the Government, and it should constitute a guaranty fund which would, no doubt, be fully sufficient for any deficiency which might occur through the insolvency of any bank and the less value of securities deposited for the outstanding notes of such insolvent banks.

A tax of 1 per cent means a cost to the banks of 1½ per cent, because they have to keep one-third in gold.  The notes to be issued by the Government should, to the largest extent, be of the higher denominations, and as soon as practicable none should be issued for less than $10.  The issue of notes of one, two, and five dollars should be left entirely to the banks, which would result in bank notes remaining in circulation and in Government notes to the greatest extent being lodged in the banks as reserve money.

As the cost of plates for the notes of small denominations might be somewhat burdensome for banks of a small capital, who can take out only a small amount of notes, there is no reason why the Government should not assume that cost, as the 1 per cent tax will immediately reimburse the Government for such outlay.  That is all I have to say on the subject.

Now, I have a little synopsis showing how the increase to $1,500,000,000 would work out in fact.  The present issue of United States notes is $346,681,016.  The bonds now deposited against circulation are to be purchased by the Government.  The part of the new issue at the disposal of the Treasury would be $1,153,000,000.  The difference between $346,000,000 and $1,500,000,000 means that the new issue of the Government notes would be $1,153,000,000.  Now we come to the point of how these new notes should be used.  The Government should purchase all the bonds which are now outstanding, deposited against circulation, at a fair price.  Just in order to put down something, I put down the prices as follows:
For 2 per cent bonds, 102½.
Three per cent bonds of 1898, 100.
Four per cent bonds, 116½.
For the Panama 3 per cent bonds, 102.

Now, when the Government bought those bonds, they would take out of circulation the national-bank notes issued against them, dollar for dollar, and they would take the bonds out of the vaults where they are now as security and destroy them.  There would be needed for this, $745,000,000.

To increase the reserve from $150,000,000 to $500,000,000 would require $350,000,000, so that out of the total of $1,153,000,000 which would be in the hands of the Government out of the sum of $1,500,000,000 there would be needed $1,095,000,000, which would leave a difference of $58,000,000 available in the hands of the Government, out of which they could redeem the outstanding 3 per cent bonds which are in the hands of the public and not deposited as security for currency.  The result of this would be that there would be only $58,000,000 more of money in the Treasury, but there would be $803,000,000 more of legal-tender money than we have now.  No gold certificates should be issued hereafter, and the outstanding gold certificates not in the hands of the banks are $520,000,000;  so that that $520,000,000, if you stopped issuing gold certificates ---and no doubt you could easily find a way to make a law to call in the gold certificates--- would practically all find its way into the banks in the country, and make them so much the stronger in cash holdings.  That is all, so far as this plan is concerned, and unless you want to ask some questions on this, I come now to the question of elasticity of the currency.

Mr. Blumenthal.  If you issue this money, it is absolutely United States money.  All you do is to put this money into the Treasury and take out the gold which you have in there, because for paying out these notes are just as good as the gold that you have lying there.  I do not know if I make myself clear.

The Chairman [Carter Glass].  No;  you do not;  because the credit of the Government is not as good as the gold.

Mr. Blumenthal.  If you claim that the credit of the Government, secured by one-third gold, is not as good as gold, then the whole scheme is impossible.  If this proposed United States note is not as good as a national-bank note is at present, it is no good.  But if you go to the Treasury Department you will find that the Treasury has about $100,000,000 ---between $100,000,000 and $140,000,000, or something like that--- in their actual banking department of gold and gold certificates.  Now, this part forms at once one part of your reserve, because you substitute those new United States bank notes for it if they are wanted.  But, as you know, the balance does not change much.  Money comes in as it goes out.  And the other gold we will have no difficulty in getting from the banks for the legal tender.

In my opinion the $500,000,000 of gold necessary could be easily obtained with the stock of gold in hand now.

The Chairman.  Do you mean to say that under a system of that kind the banks would exchange their gold for fiat government notes ?

Mr. Blumenthal.  Yes;  they would be perfectly willing.  This is only a small percentage of the holding.

The Chairman.  In other words, that would mean that the Government, instead of paying its immediate-demand obligations in real money, would impound the real money and pay its demand obligations in credit notes ?

Mr. Blumenthal.  To a small amount;  yes.  On the other hand, the Government would redeem immediately $745,000,000 of its outstanding obligations.

The Chairman.  In other words, the Government under a project of that sort would cancel its interest-bearing obligations and issue to the holders thereof non-interest-bearing obligations of the Government ?

Mr. Blumenthal.  Yes.

The Chairman.  I understand that point.  Now, what I do not understand is where the Government is going to get the gold as a reserve against these proposed non-interest-bearing obligations.

Mr. Blumenthal.  There is $300,000,000 here, right away;  and it is only necessary to get $200,000,000, and it can obtain that $200,000,000 absolutely in the process of redeeming the gold certificates.

The Chairman.  That would mean a further increase of the non-interest-bearing indebtedness of the Government ?

Mr. Blumenthal.  No, Mr. Chairman;  the entire transformation which takes place is this:  That the Government puts out non-interest-bearing debts and cancels the same amount of interest-bearing debts, and the circulation does not increase, because the Government redeems as much of national bank notes as it issues of United States bank notes.  In other words, whereas the Government is now responsible for $1,500,000,000 ---because the Government is responsible for $745,000,000 of Government bonds, and is further responsible for $745,000,000 of national bank notes, so that the Government is responsible for $1,490,000,000--- after this change is accomplished the Government will be responsible for an obligation of only $745,000,000.  That is the way it works.

The Chairman.  I do not understand that at all.  Just for illustration, say there are $745,000,000 of outstanding national bank notes, represented by United States Government bonds as a basis.

Mr. Blumenthal.  In the first place, there are $745,000,000 of outstanding national bank notes for which the Government is responsible.

The Chairman.  No;  the Government is not responsible for one cent of them.

Mr. Blumenthal.  I think it is.  The Government has to pay them.

Mr. Blumenthal. If you want to have a reserve against a note, you must get the gold from somewhere.  If you want $500,000,000 of reserves, you must procure the gold.  There may be a lot of different ways of procuring that gold, but you can easily procure it.  From the large stock of gold in this country you can easily set aside $500,000,000.  You already have $150,000,000 and $118,000,000.  There is $268,000,000;  so that all you have to take out of the circulation of gold is $232,000,000.

The Chairman.  Then, explain this mystery to me.  If it is so easy to obtain gold by issuing Government fiat notes for gold, why did Mr. Cleveland issue $260,000,000 of bonds to replenish the gold reserve in 1893 ?

Mr. Blumenthal.  Mr. Cleveland never issued a dollar of bonds to replenish the gold reserve.  That in my opinion at that time was an absolutely unfair statement.  Under Mr. Cleveland's administration the expenditures of the Government away outran the income of the Government, and every few months the Treasury was dry, because there was no money left.  That was the reason for the issue of bonds.  There were between $200,000,000 and $300,000,000 of bonds, and they said that it was a kind of endless chain.  If the receipts of the Government had equaled its expenditures and they had not issued any bonds, there would have been perhaps $50,000,000 or $75,000,000 of gold imported, and by that time money would have been so tight and would have commanded such a high rate in New York that no more gold would have gone out of this country.  But when a country runs short all the time, the money must be obtained somewhere to pay the expenses of the Government.  The administration at that time did not wish to admit that it was a lack, an insufficiency, of funds which made it necessary for them to issue bonds, as that they put it upon the ground that it was necessary in order to keep up the gold standard.  But it was not, at all.  If you will look over the figures you will find it.

Somebody comes to-day and wants $50,000,000 of gold, brings in the greenbacks and demands the gold.  The Government does not issue any bonds for it, because it is all there.  If the Government took that $50,000,000 of greenbacks and paid it out right away, the man who had received the gold or anybody else could get the notes and come back and say "I want gold, again."  That is a different matter.

If I was a man that had a claim against the Government and I came and wanted my money and it was given to me and I asked gold for it, gold would have to be given me.  Then, if the Government was obliged to pay out the paper again, because it had nothing else to pay out, the paper would be out and it would be brought back and gold demanded for it again, and bonds would have to be issued to get that gold.  That was the trouble in 1893.  The same money was out all the time, simply because the Government did not have enough income.

The Chairman.  That has not been the general understanding in the country.  The general understanding in the country was that the gold reserve was being depleted;  that it had run down to $70,000,000;  and that the Government had to issue bonds in order to replenish the gold reserve.

Mr. Blumenthal.  Yes;  but it was not so.

The Chairman.  If it is so easy for the Government to get gold in exchange for its non-interest-bearing obligations, as vou propose, it seems to me that it was a great mistake to issue interest-bearing obligations to get gold.

Mr. Blumenthal.  Mr. Chairman, it is all a question of the financing of the Government.  Now, you have seen this gold fund of $150,000,000 was created about 10 years ago.  Never once was a certificate or never once was one bank note presented for redemption against that fund.  Why ?  Because since that time the income of the Government has been equal to the expenditures.

Mr. Taylor.  That reserve was created before 1879.

Mr. Blumenthal.  No;  it was at that time $100,000,000 and it was afterwards increased to $150,000,000.  The $150,000,000 has been in existence only about 12 years.  It used to be $100,000,000.  But, mind you, this $150,000,000 is not only against the $340,000,000 of greenbacks, but it is also against $460,000,000 of silver certificates, so that we have $150,000,000 gold reserve to-day against $800,000,000 of certificates and notes.

Mr. Taylor.  Do not the silver certificates pass on a parity with the gold certificates ?

Mr. Blumenthal.  You have kept the silver certificates at a parity, but as the silver is worth only half the face value of the certificates, it means nothing.  If you will look it up you will find that it was only because the income of the Government was not sufficiently large that bonds were issued during Cleveland's administration, but it did not suit the New York bankers to make that clear, because they wanted a certain law ---[the silver purchasing clause] repealed, and it was repealed, and it was probably a very good thing that it was.

Gentlemen, I really believe, unless you want to ask further questions, there is nothing more on this;  but there is another thing which is entirely independent of this one and which refers only to the elasticity of the currency.  This, in my opinion, could be enacted independent of anything else.  In my opinion the less legislation you pass the better you are off, because there has to be legislation some time or other in the near future ---when I say in the near future, I mean within five years or so--- all over the world, because there is not enough circulating medium in the world to-day.  There will not be, unless things change, certainly.  For instance, supposing that India should not take any more gold and Brazil should not take any more gold, things might be better.  But the outlook is that these demands will continue and that we will have a further additional demand from China, which will probably become a competitor for gold.  There not being sufficient gold, this world will have to live on fiat money because it can not live on gold.  The gold is not there.

Mr. Kindred.  Is not that like the balloon that floats along beautifully and all at once collapses ?

Mr. Blumenthal.  If you can not get the gold in the world you will have to do something.  You can not stop building and production because there is not sufficient gold.  But I think the United States would make a mistake if they should pass any legislation to make it easy for the rest of the world to take gold away from us.  I would warn you against making any law which would make a large circulating medium here and make money easy, and as a consequence gold would flow away from here.  Protect your gold as much as you can and put the onus of making new legislation on the foreign countries;  because the moment we do it they will say, "Well, they have a bad system."  If we had a system such as they have in France, under which we did not give gold, they would say that we were bankrupt.  In Europe they say, "We do not give it."  That is the difference.

In New York the deposits of the national banks are $1,300,000,000.  The deposits of the State banks and trust companies amount to the same figure.  Any of the requirements which are indicated or asked for by the Government are generally required also by the clearing house for those institutions which are not under the Federal Government, so that we can say that the $2,600,000,000 would fall under the same provision.  To give elasticity to the currency, the national-bank act might be amended in the following ways:

When banks loan money below 3 per cent their reserves must be, at a minimum, 27 per cent in reserve cities and 17 per cent in other places.  When banks loan money below 2 per cent, the reserve to be a minimum of 30 per cent in reserve cities and 20 per cent in other places.

I do not know whether that is clear.  Just as in Europe the bank rate is put up and down as money is scarce or plenty, you know, in order to regulate it, this would regulate it, to make money not too easy.  To-day banks can loan money at any rate so long as they have 25 per cent reserve.  There are certain times of the year when money naturally flows to New York because there is no use for it in the country.  Of course the idea of the banks in New York is that the moment they get deposits they must be utilized, because they have to pay a small rate of interest for them.  Now, let them utilize that money as much as they want to within the 25 per cent reserve, up to the time when they can not get 3 per cent for their money any more.  When they can not get rid of it at 3 per cent and have to loan it below, why not contract the currency by telling the banks, "You can not loan money at 2 per cent unless you increase your reserves."  It would mean that before the bank loaned money at 3 per cent, they would have to accumulate $65,000,000 of money as reserve money, which would be an advantage in the country, because this $65,000,000 could be drawn out without making any difference in the position of the banks.  They could pay out $65,000,000 and still have their 25 per cent reserve, and another $65,000,000 when it comes down to 2 per cent.

In order to work it out on both sides, why not say that banks may continue to loan money until their reserve be reduced to 20 per cent, but they shall pay a tax at the rate of 2 per cent per annum on the shortage in their reserve from 25 to 22 per cent and a tax of 4 per cent on a shortage from 22 to 20 per cent.

This, again, will allow the banks, without any special law, in the natural course of business, to get rid of $130,000,000 more cash when they need it for the purposes of the country.  They could not leave that money out because they would have to pay 2 per cent on the first $65,000,000 and 4 per cent on the second $65,000,000.  When they pay 4 per cent they can not loan that money at less than 8 or 9 per cent, which will immediately put that restriction on money which ought to come to make the people more careful in the use of it and which corresponds entirely to the raising of the discount rate in Europe when money goes away.

It seems to me a very simple matter, almost so simple that it seems impossible;  and still I believe that it deserves consideration because I believe that it could be done.

Mr. Blumenthal.  Mr. Chairman, it seems to me there are two entirely different propositions, or two entirely different matters, to be considered.  The first matter for your committee to consider is whether it would be advisable to substitute United States notes for national-bank notes and to redeem a certain part of the national debt.  The second consideration would be to see, if in principle that part would be admissible or advisable.

I will put it in this way:  The first thing is to consider whether it is advisable to substitute a noninterest-bearing debt of the United States against an interest-bearing debt, and to the same amount, practically, reduce the national-bank note circulation.

The Chairman.  And to that extent to put an obligation upon the Government to redeem in gold $780,000,000 of outstanding demand notes.

Mr. Blumenthal.  Yes.  Then the next question is, if this in principle should be considered advisable and feasible, which is the way to get that gold to make a reserve of $500,000,000;  and that is a secondary question, because I do not believe there can be any doubt in the mind of anybody that in one way or another that $500,000,000 can be obtained.  In reality, all that we would have to obtain would be $150,000,000, because $350,000,000 in gold is here now.

So that there are those two questions to consider.  The first is whether this is at all feasible.

Now, there is this other thing which I would submit for your very careful consideration, and which I think is a much easier matter than this one, because I believe there are certain features in this which might work out very well and the whole plan might work out very well.  I did not come here to advocate it, by any means.  I refer to this proposition of making an automatic increase and decrease in the reserves from 25 down to 20 per cent.  I believe you could accomplish with a very short amendment to the national-banking act just what we have been looking for for so long.

Mr. Blumenthal.  They will not want a porterhouse steak, but they will not live as they used to, and they will not work as they used to work, and as they work in Europe, from morning to night, men, women, and children.  They will not live as they used to live.  Manual labor has to be compensated in such a way that they can get some joy out of life.  Otherwise they will not let the rich people enjoy it, but there will be a revolution and anarchy.

Mr. Blumenthal.  Mr. Chairman, I have taken up a great deal of your time.  There is one thing more, if you will bear with me for a minute.  Of course, I have not the slightest belief that any legislation can be passed, even if it was considered desirable, on the lines of substituting United States notes for national-bank notes, although I think it would be a very good thing if it could come before the people so that the people can think about it, I think, however, that aside from this proposition which I have made, and which I thought was quite feasible, of changing the ratio of reserves, the banks could safely be authorized to issue, not an “emergency" currency ---I wish everybody would avoid that word, because provision should be made for larger business, and I think it should be considered a boon and a pleasure, and we should call it "prosperity currency" instead of "emergency currency"--- but I think that the national banks should be authorized to issue additional amounts of notes secured partly by bonds and partly in any other way you want, but so, for instance, as to put a restriction on if the Government bonds could not be had.

The bonds to be deposited must be State, municipal, or railroad first-mortgage bonds, being a legal investment in any State, and having been approved by a commission of five members to be appointed by the President, the Secretary of the Treasury being one of the members.  The bonds to be deposited at not more than 90 per cent of their market value and not above their par value, and not more than 10 per cent of the bonds, other than United States bonds, to be of one kind.  Not more than 30 per cent of any one issue to be held by the United States Treasury as security for circulation.

A certain part of these bonds should be secured by bills receivable, such bills receivable to be passed upon and deposited with the clearing house of the district, and the clearing house of the district to be responsible for the whole, and everything to be responsible for the outcome of those bills receivable.  Banks should be allowed to issue, in addition to otherwise authorized issues, bank notes up to 10 per cent of their capital, paying thereon a tax of 2 per cent;  and raising the tax 2 per cent more with each 10 per cent additional issue, I think you will have a prosperity currency when you need it and avoid having these extreme measures in time of stress.