pressure are withdrawing funds to meet claims in other centers, or, suspicious of the continued ability of the bank to pay upon demand, or suspicious of the ultimate solvency of the bank, are calling for cash to be hoarded. The fact is that it is not necessary that a stringency have already arisen in order to bring about the panic stringency; merely the menace of stringency is necessary. The difficulty is not precisely in the fact that some banks purport to hold in large part, but actually do not hold, the reserves of other banks; that under our system of redepositing reserves more than three-fourths of the reserves, computed as somewhere else, are really not where they are supposed to be, but instead are still somewhere else, where, in turn, they really are not, and that, therefore, in times of stress the banks themselves are the most serious sources of pressure upon one another; that the banks are not only themselves among the very depositors whose calls are so disastrous, but are, of all the depositors, the ones likely to be first in their calls. Although all this is serious enough, the ultimate difficulty is that the very process by which all the banks at once are trying to strengthen their reserves is an altogether impossible process, a paradox, a deathblow at the very fundamental principle of banking. Any general attempt to convert banking paper or deposit credit into gold must promptly issue in a lamentable collapse of the whole credit machinery. The last people to make this attempt should be the bankers themselves. If other interests attempt it, the banker's duty is to intervene to save the situation. The attempt must in any case fail, but all sorts of calamity must attend this effort at the impossible. When the banks themselves join in the scramble, the last hope of supporting the credit fabric has vanished. 90. TREASURY AID IN TIME OF CRISIS1 I. BY DEPOSIT OF FUNDS During the ten days from October 21 to 31, 1907, the Treasury transferred to the national banks of New York city $37,597,000, which the banks immediately advanced to the trust companies to meet the 1 Adapted from The Independent Treasury of the United States and Its Relation to the Banks of the Country, pp. 257-60. (National Monetary Commission, 1910.) run on them. In order to aid the banks in meeting the demand of the interior for currency, the Treasury Department in three days furnished the New York banks about $36,000,000 in small bills. "As the stringency progressed the Treasurer gave relief in every important locality where assistance seemed to be required. By the middle of November the Treasury had deposited in the banks all the money it could spare; indeed, it had reduced its working surplus to about $5,000,000." An analysis of the entire problem of treasury aid in time of crisis shows that the independent treasury exercises a beneficial influence only in the earlier stages of a crisis caused by a speculative advance of prices; that in the later stages of such an occurrence its influence is evil to a greater or less degree, according as its receipts happen to exceed or to be less than its disbursements; that in a stringency caused by a rapid but healthy increase of business its absorptive influence is wholly bad, but that in the later stage of such a crisis its disbursements are promotive of good, unless mismanaged or too long delayed. Hence we see that the coincidence of a particular phase or stage of the progress of a crisis is necessary in order that the influence of the subtreasury may be beneficial. But such a coincidence is purely fortuitous, and this fact deprives the system of all value as a scientific mode of relief in crises. Further to relieve the situation Secretary Cortelyou notified the national banks that they might substitute "bonds suitable for savings banks investments for government bonds which were held as securities against public deposits." The Secretary's purpose in doing this was the same as that of Secretary Shaw in resorting to the same device four years previously. He wished to increase the volume of United States bonds available for circulation. Under this stimulus the circulation of the national banks increased by December 21, 1907, to $83,012,153. Still the difficulty of obtaining bonds and the awkward machinery of administration in issuing national-bank notes had the usual result of making the increase of circulation virtually ineffective until after the need for it had passed away. The volume of national-bank currency increased by $24,000,000 between October 15 and November 15, but at the close of the year, it had risen much more. The circulation continued to increase, however, although the demand for it no longer existed, until, about the middle of January, it became $695,927,806. Of course the usual effect on the price of bonds followed. The increased demand drove up the 2 per cent bonds as high as 110, and even at that price the amount available was regarded as too small. Accordingly the Secretary thought it necessary to adopt additional means to relieve the situation, and on November 17 he offered a loan of $50,000,000 in Panama Canal bonds under authority of the act of June 28, 1902, and $100,000,000 of 3 per cent certificates of indebtedness under the act of June 30, 1898. Of the bonds only $24,631,980 were taken by the public and $15,436,500 of the loan certificates. It is a little difficult to understand the reason for this action unless the Secretary hoped to sell the bonds and securities to people who were hoarding money. Of course the purchase of these securities by the banks, or by people who were not hoarding, simply reduced the circulation and would have made the situation worse. In order to avoid this, however, the Secretary transferred part of the purchase money to the banks. Therefore with one hand he was withdrawing money from circulation in payment of his bonds and with the other was restoring it by depositing it in the banks. The banks which purchased these securities were allowed to retain 90 per cent of the purchase price of the Panama bonds as a deposit and 75 per cent of that of the certificates. In addition to these positive means of assistance undertaken by the Secretary of the Treasury, the Comptroller of the Currency, fearing that a revelation of their condition would add to the panic in a measure, decided to postpone the call on the national banks for a report in November. This action operated favorably, because the banks were putting themselves in shape to meet the call. The delay made them more cautious in making discounts and lowering their reserves. Evidence that this was the case is found in a statement of the Secretary himself that "the fact that a call had been made and a report submitted contributed another favorable factor to the situation immediately afterwards by enabling the banks to release a part of this accumulated cash to meet the pressing needs of their clients, with the knowledge that they would probably be able to fully reinstate their reserves before another call was made by the Comptroller." 91. THE NEED IN TIME OF CRISIS1 BY J. LAURENCE LAUGHLIN It will probably appear to many that the demand of the public for expanding issues of currency is of vital importance in a time of financial distress, such as that in the autumn of 1907. It is supposed that in a time of stringency the public will demand more circulation; and to support this view the events of the panic of 1907 have been drawn upon as proof. It is true, of course, that government or bank notes could not be had in most cities during the height of the panic of 1907, even in small sums; and as a consequence the clearing-house associations issued clearing-house notes (as distinct from clearinghouse loan certificates) for circulation among the public. Without doubt this inability to get cash for a small check on a bank or at a paying office made a deeper impression on the minds of the people than any other event during the panic. It was, as everyone must admit, a striking commentary on the inadequacy of our banking and monetary system that it was impossible for the banks to supply to employers of labor and for the small needs of every day a relatively small amount of currency having a general circulation. Yet, on the other hand, it is a fact that the total amounts of the clearing-house notes for the use of the public were not large, nor were they long outstanding. Moreover, as affecting the ability of the producing and trading firms to weather the stress of the panic, they had practically no influence whatever. The power to expand their note issues (which are liabilities) could not have added to the cash reserves of the banks and thus have enlarged their power to aid needy borrowers. It is true, however, that an expansion of note issues would have aided the banks indirectly; it would have allowed them to satisfy the urgent demand of the public for a medium of exchange by passing out their notes, and thus would have enabled them to retain lawful money which could be used as reserves to support their loans and deposits. The reserve city bank which can quickly increase its own notes can also supply the demands made upon it by country national banks and correspondents-provided the country bank wishes only currency for circulation in the neighborhood and not for its own reserves. Here, again, the new bank issues do not give the pivotal Adapted from "Banknotes and Lending Power," Journal of Political Economy, XVIII (1910), pp. 779-83. aid which some suppose always comes from additional circulation. Not being lawful money they could not be used in reserves, and therefore would not-and could not-improve the lending power of the local country bank. They would, however, supply currency to the country bank which could be paid out, if urgently demanded, and thus indirectly protect reserves. Another advantage in emergency bank notes, of course, is the opportunity they present to national banks having relations with state banks and trust companies. By issuing their own notes they may exchange them for lawful money held by banks outside the national system. In this way they can indirectly increase their lawful money, and consequently their power to lend. But, primarily, the issue of bank notes is for circulation in the hands of the public and not for any serious advantage which they render in increasing the power of the banks to lend and stave off a panic. The real difficulty resides, not with the general public and the media of exchange-for checks are as good as ever as a medium of exchange if there are deposit accounts on which they can be drawnbut with the banks, with the power of the banks to expand their loans in a time of stress. This is the pivotal thing in any plan to relieve the distress of a financial panic. 92. BOND-SECURED NOTES AND CYCLICAL ELASTICITY1 Bank notes secured by bonds are open to several serious objections from the standpoint of elasticity. In the first place the bonds sell above par and bear a low rate of interest; and yet, in times of financial stringency, the rate of discount is sure to be high, and borrowers are in great need of loans. As against buying bonds bearing a low rate of interest in order to issue notes, there is the opportunity for the banks to loan such funds directly at the high market rate of discount. The situation, therefore, puts a premium upon the direct use of banking capital, as against the method of investment which. leads to increasing the bank-note circulation. In those communities where bank notes are essential to making discounts this is a serious obstacle. In short, at the time or place of pressing demand under the existing system the supply of notes is not forthcoming. On the other hand, if the country is suffering from business depression, if funds are accumulating in the banks, and if the market Adapted from Report of the Convention of Indianapolis Monetary Commission (1898), pp. 228-30. |