use of its own, was money at the ratio of $4 for every $1 of its own money it was required to lock up in its own vaults.

The same provisions authorized the bank to receive the money of others, invest it as its officers saw fit, subject only to the requirement that it should keep on hand in its own vaults 25 per cent of these deposits, in lawful money, with which to meet demands of depositors for their money as the same were made.

They accomplished this further end. They withdrew from circulation the legal tender money of the country equal to 25 per cent of the outstanding bills of all the national banks of the country thereafter to be organized, and 25 per cent also of all deposits in all of these banks, and left the enormous vacuum occasioned by such withdrawals to be filled by the notes of these banks, and in no other possible way. On the 24th of September last, as shown by the report of the Comptroller of the Currency, the aggregate of these deposits was almost five billions of dollars, requiring a withdrawal from circulation of the legal tender money of the country of nearly $1,250,000,000.

But, liberal as these provisions were, they did not satisfy these corporations. They first asked and obtained from Congress leave to invest their own notes up to the face value of the bonds they had deposited, and they then asked and obtained leave to withdraw their reserve of 25 per cent of their outstanding notes that they might utilize the same to the best advantage possible, instead of having it tied up in their own vaults.

When they had accomplished this they had not a dollar invested in their business that was not interest-bearing, payable to themselves, and they had appropriated sufficient of the nation's credit to enable them to issue and put in circulation, as money, a sum of their own notes equal to the entire face value of the bonds they had deposited, upon which bonds they were annually collecting interest from the government.

They had also made the national bank note credit money only, as pure and simple as ever the old discarded greenback was such money, for all they had added as security to the greenback of old was the individual credit of the private corporation that issued the notes.

How little this amounted to in a practical way is evidenced by the well-known fact that no man, wherever located, stops for an instant to inquire by what corporation a national bank note offered him is issued. It is sufficient for all to know that behind each of these notes, wherever or by whomsoever issued, stands the credit of this

great nation, pledged for its redemption if the bank issuing it fails to redeem it.

128. DOUBLE PROFIT ON BANK-NOTE ISSUES

BY R. W. JONES

The government bonds upon which the bank notes are issued are safely deposited in the United States Treasury. The bankers draw coin interest on these bonds from the Government and pay no taxes upon them. The Government allows them to issue about 90 per cent of the amount of their bonds in notes, thus without any cost to the banks except the tax on their issues increasing their interestbearing capital 90 per cent. In other words, upon a capital of $100,000,000 they can reap profits from $190,000,000. They lend at from 8 to 12 per cent interest. The people pay them on their bonds from 5 to 6 per cent interest. Thus the people pay from 13 to 18 per cent interest to the national banks on every dollar of "Blackbacks" in circulation. Besides this the Government coins and issues to the banks their notes free of charge. The Government must also settle up the business of every broken bank. This is a useless and extravagant system, calculated to concentrate wealth and rapidly enrich the money power of the country at the expense and by the oppression of the people.

129. ANALYSIS OF PROFIT ON BANK-NOTE CIRCULATION

It has been assumed by those not fully informed on the subject that the issue of national bank circulation is attended by a large profit; that is, that the banks receive the fixed interest on the bonds deposited as security for circulation and current rates of interest on the total amount of notes received, making their net profit the sum of these two returns. The fact, however, that the volume of circulation outstanding is approximately only 70 per cent of the maximum issuable that is, an amount equal to the paid-in capital stock of the banks is evidence that the circulation franchise is not as profitable as would appear.

Below is given a computation made by the Actuary of the Treasury Department of the profit on circulation, based upon the deposit of $100,000 of the various classes of bonds available at the average net

2

1 Adapted from Money is Power, pp. 4445. (Davis & Freegard, 1878.)

Adapted from Report of Comptroller of the Currency, 1911, p. 12.

price. By reference to this table it will be noted that money is assumed to be worth 6 per cent. From the gross receipts, that is, interest on the bonds, and the interest on $100,000 circulation loaned, at 6 per cent, deductions are made for the tax on circulation, expenses incident to redemptions, shipments of currency, etc., and the sinking fund, to show the net receipts. The actuary then computes the interest on the cost of the bonds at 6 per cent, the difference between this amount and the net receipts being the net profit to the bank.

Two per cent consols of 1930 were at the highest average net price in March last, and as a result the profit on circulation was at the lowest point, namely, 1.296 per cent. These bonds were at the lowest point in July, namely, 100.250, when the profit on circulation is shown to have been 1.412. The highest-priced Government issues are the 4 per cent bonds of 1925, and were held at 116.86 in January last, when the profit on circulation was 0.986 per cent. At the market price of 114.134, in August last, the profit on circulation was at its maximum, namely, 1.226 per cent. The Panama Canal bonds of 1916 sold, on an average, in August last, at 100.303, when the profit on circulation was 1.410 per cent. The highest average price during the year for these bonds was 101.250, in April last, and the percentage of profit on circulation 1.325.

VII

THE FEDERAL RESERVE SYSTEM

Introduction

The Federal Reserve System in which our national banks are now organized was inaugurated by the Federal Reserve Act of December 23, 1913. For fifty years our banks had been operating under the national banking law that had been passed during the Civil War. This act gave us a safe and uniform bank-note currency, and in other ways it constituted so substantial an improvement over the conditions that had existed prior to the war that we were long loath to tamper with it seriously. While defects were early revealed, they appeared in the main to be of such a nature as required amendment merely, rather than thoroughgoing revision.

But the panic of 1893 revealed serious shortcomings in the national banking system. It was found that the great dearth of money that developed could not be relieved by an increase in that element of our currency system to which we must look for elasticity, namely, the bank notes, and it became necessary for the clearinghouse associations, and even private businesses, to issue a wide variety of substitutes for cash. The same phenomenon had of course been manifested in 1873, but the nature of the difficulty was not so generally understood at that time. It also became apparent in 1893 that in consequence of inadequate and rapidly dissipating reserves our banks were unable to expand their loans to meet the needs of a crisis.

The result of the experience of 1893 was the advancement of the Baltimore plan of currency reform, which was modeled after the Canadian system of issuing currency protected by a joint guaranty fund to which all the banks contribute. Nothing came of the plan, however, the silver issue of the time forcing all other financial matters into the background. Again, in 1898 the Indianapolis Monetary Commission, after a thorough survey of the banking and currency problem, suggested some substantial amendments to existing currency legislation, among which was the issue of bank notes based

upon commercial paper, or asset currency. However, the SpanishAmerican War diverted our attention to problems of international policy, while the long period of prosperity which followed caused us in the main to forget the question of banking reform. However, the act of 1900, in providing that national banks might thereafter issue notes up to the par value' of bonds deposited as security, gave us a rapid expansion of bank-note currency; but it did nothing to provide the necessary elasticity.

The disastrous panic of 1907 thoroughly aroused the country to the imperative need of banking reform. It was observed that whereas other countries were equally subject to periodic fluctuations of commerce and trade the United States appeared to be the only nation in which the banking machinery was incapable of alleviating the conditions that developed in time of crisis. Strong pressure, partly political, was brought on Congress to pass some emergency legislation. After a very brief study of the problem Congress passed the Aldrich-Vreeland Act of 1908, which provided for the issue of emergency notes in time of stress through groups of banks in various communities organized into national currency associations. This currency could be based in part on commercial paper, and thus for the first time we secured legal permission for an asset currency. Moreover, good service was rendered by this act at the outbreak of the European war, just prior to the inauguration of the Federal Reserve System. The Aldrich-Vreeland law, however, was confessedly a temporary measure, its final clause authorizing the appointment of the National Monetary Commission and making appropriation for a thoroughgoing study of the entire banking problem.

The movement for banking reform then rapidly developed. The National Monetary Commission in its investigation drew upon the experience of the entire world, and a vast literature on the subject was collected and published-nearly fifty volumes in all. Meanwhile numerous independent students were analyzing the problem, with the result that the various weaknesses of the national banking system, as indicated in our previous chapter, were clearly revealed. A large number of comprehensive plans of reform were also put forward, many of them as bills in Congress, and others in the form of monographs by commercial associations and independent students of the question.

To market value, only, when market value is less than par.