banks themselves drew and held all the money of any kind they could obtain. A curious feature of the situation was that there was more of a panic among the banks than among the people; but the hardship was to business generally. Every class of business was interfered with, so that business operations of every kind were curtailed. Factories have suspended, workmen have been thrown out of employment, orders have been canceled, the moving of crops has been retarded, exports have fallen off at a time of the year when they should be at their highest. Another serious result has been the reduction of the volume of foreign credits available just at the time when they are most needed to offset the large imports of gold which have been made.

It was not the failure of a few banks which brought on the panic. It was the system which rendered a panic practically inevitable under certain conditions-and they are conditions which can be many times repeated. It was not lack of confidence on the part of the people, but lack of confidence in the banks themselves. They were fearful that the reserve system would break down, and it broke down. They were fearful that a sufficient amount of currency could not be supplied to meet the demands-the demands were all made at once and there was not a sufficient amount to meet them. The remedy lies in improving the reserve system, so that the reserve deposits of the banks shall be kept where they are always and certainly available, and in imparting to our currency system an element of elasticity, so that, when there comes a sudden demand for bank-notes, they can be supplied without obliterating the reserve. This can only be satisfactorily accomplished through the establishment by the Government of a central bank of issue and reserve-the system which is working so satisfactorily in all of the great commercial centres of Europe. It would not only solve the two great problems of our banking system, but would also provide the machinery for conducting Treasury operations with the least disturb


The real weakness of our present banking system is the

result of the provision regarding reserve deposits, through which the reserves are piled up in central reserve cities, without a sufficient amount of actual cash reserve on hand, so that when an emergency arises the reserves are not reserves at all. It would help against embarrassment to add to the reserve required, all along the line; but the proper solution is to increase the amount and require all reserves to be held in a central bank organized for that purpose. The depositing bank would not only be sure that the funds were always available, but that, as long as it was solvent, it could go to the central bank and get any amount of cash needed on notes of its customers or other good security. With such a bank to depend on, no solvent bank need ever doubt its ability to meet all possible demands.

The law concerning reserves, as it stands, requires that a minimum reserve of twenty-five per cent. on deposits be held in lawful money in the vaults of the central reserve city banks. The reserve cities must also keep twenty-five per cent. reserve, one-half of which may be on deposit in the central reserve banks. Banks in all other cities are required to keep fifteen per cent., three-fifths of which may be on deposit in reserve or central reserve cities. With any lack of confidence, this system is necessarily a source of weakness instead of strength. Realizing upon what small margins they depend, each bank is, in self-defence, impelled not only to collect its loans, but to withdraw its reserve deposits. Deposits of $10,000,000, in country or non-reserve banks, call for a cash reserve to be kept in those banks of only $600,000, with $900,000 on deposit in reserve city banks. These banks must have in their vaults only $112,500 of the amount, with the same amount on deposit in central reserve cities, where, in turn, there need be on hand but $28,125 representing it. There is, therefore, but $740,625 in cash, kept, unloaned, anywhere, against this deposit of $10,000,000 in the country banks. Of this only $140,625 is outside the banks' own vaults. If there is a reduction in the deposits of the country banks, of $150,000, out of the ten millions, only one and one-half per cent.,

it calls for more cash than has been kept on hand in reserve banks for the whole ten millions. What wonder that the fall demand for $200,000,000 in currency, for crop-moving, always causes anxiety, and that when it is accompanied by a withdrawal of deposits and curtailment of credits, caused by uneasiness or distrust, the banks are forced to drastic measures in self-defence.

There is nothing new in this situation. It has been known to all students of our banking and currency system, and has been written and talked about for many years. It has produced panic after panic, and a stringency in the money-market every fall for forty years. It was wholly due to this that the crisis of October assumed the phase of a bank panic and spread over the country. There was no other reason at all why the banks as a whole should have become involved, and their business and that of all of their customers disturbed as it was. All that was needed to have prevented this was a proper system of credit bank-note currency and bank reserves, both of which would have been supplied by a central bank of issue and reserve. There would have been no scarcity of currency, no derangement of domestic exchange and no panic among the banks or among the people.

The only way in which bank-deposit credits can be properly protected from sudden calls, when all banks may be involved at the same time, is by a system of note credits which can be at any time and immediately exchanged for deposit credits. They are essentially the same thing, and they should be daily, hourly, if necessary, convertible from one to the other. With such a system there is no inflation or expansion when a note is paid out, and no contraction when a note is returned. It makes no difference to the bank or to any one but the customer, who uses either at his 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.

Our bond-secured bank-notes offer no help to a bank in sudden calls for deposits. They are a fixed currency, issued on the secured currency principle, as distinguished from the

credit or banking principle. When issued they stay out indefinitely, only returning to be renewed when worn out. It is only when the bonds for security can be borrowed or some Government deposit is obtained that they are of any value in meeting an emergency. It will not help the matter to increase the volume of bonds. It would only increase the volume of rigid, unelastic notes. They would only be a power of expansion till they were issued. Then they would stay out, with no tendency to contraction when not needed. There would be no temporary expansion possible to meet the sudden demands of an emergency. We must have a note circulation which can change quickly and automatically in response to demands. Contractibility is quite as necessary as expansibility. Several of the panic reliefs which have at various times been suggested have good points. They would serve a purpose in quieting a panic after it is under way, but not in preventing it. The use of Clearing-house certificates by the banks has been found a very efficient means for their defence, and on many occasions has probably prevented a great number of bank failures during panics. But they are only half-way measures. They carry us no farther than to the inevitable conclusion that we should have a national and central bank of issue and reserve. Clearing-house certificates, which are really credit-notes on a large scale, should be issued by a central bank under Government authority. This would have none of the disadvantages of the other system, while it would have all of the advantages and many more besides.

The real need is for something that will prevent panics, not for something that will relieve them; and the only way to attain this is through the agency of a Governmental bank. The experience of all other countries has demonstrated this. We shall surely have panic after panic till we learn the plain lesson which the others have learned and adopt the only efficient, scientific and proper means to protect our business interests. It is a matter of greater importance to the people at large than it is to the banks themselves. The banks devise

ways and means to stand together, with the aid of the Clearing-house, and by suspension or partial suspension of payment to bridge over and avoid failure. But the other business interests of the country are left almost in a state of chaos. The machinery of domestic exchange suddenly stops. Collections and remittances are almost impossible. Manufacturers are forced to suspend. Workmen are thrown out of employment. Business men are forced to fail through no fault of their own. There is no citizen of the United States who is not in danger of more or less loss and embarrassment. And worst of all is the long period of depression which follows a panic, bringing suffering and privation to those who are in no way to blame. The thing which is absolutely essential is a banking system with bank-notes which will be responsive to the demands of business and will as readily contract as expand; with a system of bank reserves which shall be real reserves and always immediately available.


In 1913 Congress created a new system of banks which was expected to correct the defects complained of in the preceding numbers. In the following article Professor E. E. Agger explains the principal provisions of this law: (1914)

The factor most largely responsible for the peculiar organization of the new system was the desire for the centralization of reserves. The plan adopted involves no absolute centralization of reserves, but, rather, a district centralization with the possibility of effecting virtually complete centralization should the necessity therefor arise.

The holders of the centralized reserves are to be banks specially created for the purpose and known as Federal Reserve Banks. The law provides for from eight to twelve "federal reserve districts," in each of which is to be designated a “federal reserve city," in which the new banks are to be established. Each federal reserve bank may establish branches in other places in its own district, and also in other districts

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