present crisis, when a real emergency arises these reserves are not reserves at all, because they may in a day become unavailable.

It will be an improvement to add to the proportion of reserve to be held in cash by the country banks and the reserve city banks, but the proper solution of the difficulty is to increase the amount to be held in cash by all the banks and require all the reserve deposits to be kept with a central bank organized for that purpose. The increase in cash reserves from 6 or 10 or even 15 per cent in the country banks would not help a bank very much when it had any large demand for its deposits. What such a bank needs is a safe reserve in cash and a further reserve with a bank where it is surely available, at any time, in currency. This would be the case with reserve deposits in a central bank. Further than this, the depositing bank could be sure that at any time, as long as it was solvent, it could go to the central bank and get any amount of cash needed on the notes of its customers, or other good security. With such a bank to depend on, no solvent bank need ever have any fear of its ability to meet all demands. The present banking law prescribes a minimum reserve on deposits in central reserve cities-New York, Chicago, and St. Louis of 25 per cent, all of which must be in the vaults of the bank, in lawful money. The reserve cities are required to keep 25 per cent reserve, onehalf of which may be on deposit in the central reserve cities. Banks in all other cities are required to keep 15 per cent of reserve, of which three-fifths may be on deposit with reserve or central reserve cities, all three classes of banks being given credit for their 5 per cent redemption fund as reserve. Whenever there is a disturbance among the banks and any impairment of confidence, this system is always a source of weakness instead of strength. This is what may make a panic among the banks before there is even any decided uneasiness among their depositors. The banks realize upon what a small margin they depend, and each one, in self-defense, is compelled not only to collect its loans, but withdraw its deposit reserves.

Under this reserve system, deposits of $10,000,000 in country, or nonreserve city banks, would call for a cash reserve to be kept in their vaults of but $600,000. They could carry and count as reserve $900,000, on deposit with reserve city banks. These reserve city banks would be required to have in their vaults cash to the amount of only $112,500, and might deposit $112,500 in central reserve cities, who, in turn, would have to have on hand 25 per cent, or but $28,125 in cash. To recapitulate this in the form of a table:

CASH RESERVE ON DEPOSITS OF $10,000,000.

Amount of cash outside original country banks, $140,625, or 1.4 percent.

It will thus be seen that the country bank keeps but 6 per cent on hand in cash, and of the country bank's reserve deposits the city banks keep but 1.4 per cent on hand in cash. There is therefore but 7.4 per cent of cash, or $740,625, kept unloaned anywhere against this deposit of $10,000,000 in the country banks. Of this but $140,625 is outside the country bank's own vaults. If, therefore, there is a reduction in the deposits of the country banks of $150,000 out of $10,000,000, or only 12 per cent, it calls for more cash or reserve money than has been kept on hand for the whole $10,000,000 in the reserve banks. Is it any wonder, then, that the demand in the fall for about $200,000,000 in currency for crop moving always makes a disturbance and that when this demand was accompanied by withdrawal of deposits and a curtailment of credits, caused by uneasiness and distrust, that the banks were forced in self-defense to partially suspend payments, adopt clearing house certificates, and various other expedients to furnish currency to meet such an emergency? The surprising thing is not that there has been such a disturbance of credit and business, but that the situation has been met as well as it has. It speaks volumes for the credit of the banks that they have done as well as they have, and shows the confidence of the people in their ultimate solvency and strength. It is the greatest possible evidence of the wisdom, patience, forbearance, and sound, conservative sense of our business men.

It does not, however, speak well for our political wisdom that this condition has been allowed to stand unchanged without any attempt to improve our laws. This situation is nothing new, but has been known to all students of our banking and currency system and written and talked about for many years. It has produced disturbance and stringency every autumn for forty years, and panic after panic.

It is directly and immediately due to this that the crisis of October, 1907, assumed the phase of a bank panic and spread all over the country, instead of being confined to the comparatively few people and concerns who were first involved, and it undoubtedly added to and spread the business reaction in all directions.

The people of all the world have been overtrading for years, especially in the United States, and the reaction was inevitable and doubtless desirable, but it might and should have been more gradual and should not have had its greatest effect on our banks. Many firms might have failed and probably some banks which were badly extended or loaded up with speculative loans and securities. We should have had a gradual, though considerable, reduction in the volume of all kinds of business and a wholesome period of economy and more normal living and trading. This would have been, in the end, beneficial, and with the wonderful recuperative resources and wealth of the United States any business properly managed and based on right conditions would soon have improved and have been as prosperous as ever. There is no reason at all that our banks, as a whole, should have become involved as they have and not only their business, but that of all their customers, have been so disturbed as it is to-day. All that is needed to have prevented this is a proper system of credit banknote currency and bank reserves, both of which could have been supplied by the central bank of issue and reserve.

If the banks had known that there were facilities for exchanging any reasonable amount of deposit credits to note credits without de

pleting cash reserves, and, further, that the reserves that they had were on deposit where they would be immediately and surely available in currency, there need have been no alarm among them. There would have been no scarcity of currency; no derangement of the domestic exchange; and there would have been no panic among the banks nor among the people.

The only way in which bank deposit credits can be properly protected from sudden and unexpected calls, when all may be involved at the same time, is by a system of note credits which can be at any time immediately exchanged for the deposit credits. They are essentially the same thing, and should be, daily and hourly if necessary, convertible from one to the other, at the option of the creditor who is the depositor or note holder. The bank of issue should be required, and must in self-defense, keep the same reserves against notes as against deposits. If this is done, there is no expansion or inflation when a note is paid out to a depositor, and no contraction when a note is returned to the bank for deposit. With a given amount of reserve money, a given total of deposits and notes can be maintained, and it makes no difference to the bank or anyone else but the customer, who uses either, at his own option, whether the deposit remains in the bank as a credit to be checked against or is taken away in the shape of a circulating note. The only thing is to make the note, from the circumstances and conditions of its issue, perfectly secure to the holder, which can be done with absolute safety in a credit note.

Our bond-secured bank notes offer no help to a bank in any sudden call for deposits. From their very nature they are fixed currency, issued on the secured-currency principle, as distinguished from the credit or banking principle. When issued they stay out indefinitely, without redemption, merely being renewed on the average once in two years because they are worn out. They can not be issued or retired quickly, and the purchase of bonds for their security requires as much money as they furnish when issued. It is only when the bonds for security can be borrowed or there is some government deposit obtained that they are of any value in meeting an emergency calling for deposits. Nor will it help the situation any to increase the volume of bonds obtainable as security for notes or to accept as security for them other than United States Government bonds. That would only add to the volume of the rigid, inelastic notes, such as we now have, and they would be no more responsive to the demands of business. There would be some power of expansion until they were all issued; then they would stay out with no more tendency to contract when not needed than we have at present. They would tend to inflation, but having no tendency to contract there would be no expansion possible to offer relief in any emergency calling for current cash or the payment of deposits. What is needed in such a case is note circulation which can change quickly and automatically in response to the demand, and contractibility is quite as necessary as expansibility.

The issue of the so-called emergency credit notes, with a high tax to retire them when not needed, would be somewhat better than more bond-secured notes, but the high tax would prevent their use except when the situation had become acute and the emergency very grave. Their issue would at once be a confession of weakness and a danger signal that no bank would dare make until in desperate condition. They undoubtedly would be useful in emergencies, and would be a great aid in restoring confidence and quieting a panic after it might be

well under way, but they would not be an efficient means of preventing panics, except so far as there might be some moral effect from the knowledge that they would be available in case conditions became bad enough to justify their use.

The present bank-note circulation can be best improved and made elastic by permitting the banks to issue a fixed percentage of their note-secured circulation or capital in notes uncovered by bond deposits. If, against these notes, banks are required to carry the same reserve as against deposits, it will preserve the similarity which is necessary between note credits and deposit credits. These notes can be made perfectly safe by a guaranty fund of not over 5 per cent, which would be many times the amount of money required to redeem the notes of failed banks, based on the experiences of forty-four years. There should be a graduated rate of taxation on these notes, beginning with not over 22 per cent, and reaching finally to 6 or 7. The addition of such notes to our system would do much to improve it, but still it is not believed that it would be as efficient or as satisfactory in any way as to have all the credit notes issued by a central bank of issue. The use of clearing-house certificates by the banks has been found a very efficient means for their defense, and has, on many occasions, probably prevented a great number of bank failures during panics, and there is some merit in the suggestion that the clearing house should be recognized by law and authorized, under certain conditions, to issue clearing-house certificates for use as emergency circulation. The adoption of this idea might make a great improvement in our banking system, but this is only a half-way measure. The full development of the national clearing-house idea in the adoption of this principle should carry us further and to the inevitable and logical conclusion and lesson to be drawn from it, which is that we should have a national central bank of issue and reserve.

Instead of stopping at the issue of clearing-house certificates, which are really credit notes on a large scale, it would be far better to have these notes issued by a central bank under Government authority and under proper laws and regulations. This could be done far more systematically and efficiently; it would have none of the disadvantages of the other system, and would have all its advantages, and more besides.

It is useless to try to evade this question or dodge the issue. The need is far more for something that will prevent emergencies and panics than for devices to be used in stopping one after it has occurred. The only way to make our system what it should be is through the agency of a national governmental bank. The experience of all other countries has demonstrated this. Every important commercial country in Europe has adopted this general plan. If we had had such a bank in operation in 1907, no such bank panic as we have had would have been possible. Unless we do something of this kind we shall always be in danger of a recurrence of the same thing, and we shall have panic after panic until we learn the plain lesson from experience and adopt the only efficient, scientific, and proper means to protect our people in business from such disasters. This is a matter that is of even greater interest and importance to business men, and the people generally, than it is to the banks themselves.

When a panic occurs the banks are able, as they have been in the last few weeks, to stand together, and through their clearing-house

92180 0-63-30

associations and other means, cooperate for their own protection. They issue clearing-house certificates and other temporary currency, and by partial or more or less complete suspension of payments tide things over and avoid failure. They call for and very properly receive all the aid that can be given them by the Treasury Department, and the National Government, and the net result is that while a few banks that are badly expanded or improperly managed fail, the great majority of them are able to take care of themselves.

While such a condition prevails among the banks, the other business of the country is almost in a state of chaos. All the machinery of domestic exchange suddenly stops. Collections are almost impossible to make, and it is almost equally difficult to make remittances. When a business man has obligations coming due, not only his bank account is unavailable, but the people who are indebted to him, and who may want to pay, are entirely unable to send him remittances, in any shape, which he can make available. Manufacturers are forced to suspend; workmen are thrown out of employment; business men are forced to fail, through no fault of their own, but simply for the reason that suddenly, and without warning to them, all the banking machinery and facilities of the country break down and cease to perform their proper functions. There is no citizen of the United States who is free from the dangers, losses, and embarrassments produced by such a situation, and probably the worst feature about it all is that after such a panic there is always a long period of depression, bringing suffering and privation to those who are the least to blame.

There can be no higher duty of government than the passing of the necessary laws and the adoption of a system to prevent occurrences which produce such widespread financial injury and disaster. The thing absolutely essential for banking is a system of thoroughly safe bank notes, which will be responsive to the demands of business and as readily contract as expand; and, in addition to this, a system of bank reserves, which will be real reserves when needed and always immediately available.

There have been many plans suggested by which some elasticity may be introduced into our national bank-note currency. All of them have more or less merit, and all of them have some serious objection. The best way, and in fact the only thoroughly efficient and good way, to issue these notes is through a central Government bank. That is the way it is done in France, where they have had, for more than a century, a central bank which is the admiration of the world. It is the method adopted after several experiments in Germany, and it has worked with great satisfaction and benefit to all the German people. Business is very much the same all over the world, and our problem is so similar to theirs that we should take profit from their experience and learn from them how to perfect our system.

The installation of a proper central bank would not only be a great benefit to all the business of the country and a great protection to our people, but it would solve the problem of the relations of our Treasury Department to the business of the country. It would give us not only a reliable and efficient system in handling our Government finances, but add stability and safety to our banking system. It would shield and protect the citizen in all the relations which are so vital to him for the conduct of his business or the support of his