a little different machinery, as France or Germany, and if that is the fact, and that bill could be passed and this Monetary Commission bill could not, and mine accomplishes what you declare ought to be accomplished Secretary GAGE (interrupting). Then it would be perfectly satisfactory to me in that particular. The CHAIRMAN. When a bank issues currency it has the right to take out against its assets to the limit of its capital. It secures currency to the amount of its capital, puts it in its vaults, and keeps out what it well can, having currency always in its vaults to put out whenever there is a call for it and they can get it out. It has, in addition to that, the capital, which is not depleted by a dollar in loaning currency. Secretary GAGE. That is right. CURRENCY ISSUED AGAINST ASSETS. The CHAIRMAN. If they have to put up bonds they can buy at par and issue currency to the amount of the capital; it absorbs every dollar of their capital. Secretary GAGE. That is right. BANK CURRENCY REDUCES INTEREST RATES. The CHAIRMAN. Then, if a bank can make loans of its deposits to an amount sufficient to make money enough to pay its expenses of every name and nature and they just balance (assuming that they can keep out all their currency)—then they can make loans at one-half the rate of interest they could if the capital was used up to take out currency secured by bonds. Secretary GAGE. That is substantially true. The CHAIRMAN. Now, every dollar of currency, where the currency is issued against assets that remain in the vault of a bank, remains there without the slightest loss to the bank, except the printing of it. Secretary GAGE. That is true. * * 典 Suppose that with a bank the same circular movement of gold goes on that was spoken of a little while ago. The probability is that every bank in every money center redeems every day from 10 to 15 per cent of its liabilities, creating new liabilities to someone else, and the next day liquidating again and again, always new creditors settling and satisfying former creditors. There is a substantial redemption of a bank's liabilities. A bank's notes are not different in their essential character from the bank's deposits. They are the same in their nature and are governed by the same general principles. BANK CURRENCY, THE FARMERS AND WAGE EARNERS' "CERTIFICATE OF DEPOSIT" AND BANK CHECK. Mr. WALKER. Is it not the practice of merchants and manufacturers and those living in cities to leave the proceeds of a personal note discounted for them by a bank in the possession of a bank in the form of an "individual deposit," to be drawn out by checks, drafts, etc.? Mr. FAIRCHILD. Yes. Mr. WALKER. On the other hand, is it not the almost universal practice of the people who live in sparsely settled sections of the country, and especially the farmers, to take home with them the currency notes of the bank discounting their time notes rather than to leave the proceeds in the bank discounting or in another bank? Mr. FAIRCHILD. I understand that to be the case. BOND-SECURED CURRENCY OPPRESSIVE. Mr. WALKER. Then is not a very great hardship worked to those sections of the country under a banking system which does not allow the free issue of paper on the true banking principle? Mr. FAIRCHILD. I consider it so. Mr. WALKER. Is not currency note to the person holding it the equivalent of a certificate of deposit or a certified check in the bank? Mr. FAIRCHILD. It is, except that it is more available for him. Mr. WALKER. Better for his purpose? Mr. FAIRCHILD. Yes. Wr. WALKER. Then it follows, does it not, that any great expense put upon banks in getting currency notes to issue is a great expense, hardship-in fact, oppression-to those citizens who do not use checks, drafts, etc., in their transactions, and who are practically compelled to use currency or do without banking accommodations? Mr. FAIRCHILD. Yes, sir. BOND-SECURED CURRENCY CHECKS ENTERPRISE. The CHAIRMAN. It follows, then, that a currency made expensive, or one that lessens the amount of loanable funds the bank has on any given amount of capital and deposits, checks enterprise by making production difficult and expensive to those people who naturally and inevitably are shut up to the use of currency in getting bank accommodations instead of using checks, drafts, etc.? Mr. FAIRCHILD. That is true. Mr. HILL. Do you mean by your answer to imply that there should be unlimited bank issues? Mr. FAIRCHILD. No. Mr. HILL. Does not the question asked by Mr. Walker involve that? Mr. FAIRCHILD. I did not so understand it. Mr. HILL. Will you kindly ask Mr. Walker to have that read again, and in the light of that repeat your answer? Mr. WALKER (reading the question again). That does not involve quantity at all. Do you wish to change your answer? Mr. FAIRCHILD. No. CURRENCY ISSUED FREELY LOWERS RATE OF INTEREST. Mr. WALKER. It follows, then, that by issuing true bank currency a bank can make its loans to the people patronizing it at as much lower rate of interest than it could if it had only its capital and deposits to lend, and no currency, as the currency it has in circulation bears to the whole amount of its loans and discounts, and pay the same dividends on its capital stock? Mr. FAIRCHILD. I should say that by the amount its circulation increases its resources it is enabled proportionately to give a greater accommodation to its customers, and necessarily at a less rate. Mr. WALKER. Compelling a bank to buy bonds at par to secure its currency notes, even if the bank secures notes to the par of such bonds, depletes its loanable funds, as compared with the "true bank currency" issued against its assets, by every dollar it pays for such bonds, does it not? Mr. FAIRCHILD. I think so. Mr. WALKER. Then, compelling banks to use "bond-secured" currency compels the people borrowing of such banks to pay a higher rate of interest as compared with banks issuing "true banking currency" against their assets-as is done in every other country-in proportion to the amount of such currency the bank uses in comparison to its whole loans and discounts? Mr. FAIRCHILD. It seems to me that is very much the same as the other question. I would repeat my answer to the other question. TRUE BANK CURRENCY ISSUED BY COUNTRY BANKS. Mr. WALKER. Mr. Fairchild, the statistics collected by the Treasury Department show that in Vermont all the banks combined (not a single bank) kept in circulation an average of 103 per cent of the currency to its capital. You will find the statistics on page 441 of the hearings before this committee in 1896. Old Virginia kept out 96 per cent; North Carolina 95 per cent. You will find by turning to page 458 that 55 per cent of the country banks in Massachusetts-outside of Boston, which had the least currency-had over 64 per cent; Ocean bank, Newburyport, 91 per cent to capital; Powow River, Salisbury, 110 per cent; Brighton, 112 per cent; city of Cambridge, 96 per cent; Malden, 87 per cent. This indicates, does it not, that the poorer sections of the country, the agricultural districts, like Vermont and North Carolina and Virginia, can keep in circulation if they are allowed to do so, about 100 per cent of currency to capital? Mr. FAIRCHILD. It shows that they did. The CHAIRMAN. Is it not a fact that the average of the banks in the country can keep in circulation nearly double the currency at certain seasons of the year over what they can at other seasons? Mr. FAIRCHILD. I do not know the exact proportions. Mr. WALKER. But usually much more? Mr. FAIRCHILD. It is usually much more. BORROWERS GET THE ADVANTAGE OF "FREE CURRENCY ISSUE.” Mr. WALKER. Where the business of banking pays a larger profit than other business of like labor and risk, will not capital be invested in new banks in competition with existing banks until the profits in banking are reduced to the general average of incomes in other investments? Mr. FAIRCHILD. That is the natural law of such things, in banking as in anything else. Mr. WALKER. Is it not within your knowledge that in Canada, Scotland, Germany, and France the rates of loans and discounts all over those countries are very nearly the same where the same risk is incurred and the same time and amount is involved? Mr. FAIRCHILD. That is the case in Canada, and I understand in Scotland also. Mr. WALKER. It is because the branches in the country allow them to circulate such an enormous amount of currency that it is possible. It is the currency privileges of banking that they could not exercise if they were strictly a city bank; but with branches out through the country it enables them to circulate their currency, which keeps the rates down in the country as compared with the city? Mr. FAIRCHILD. I think that has a great effect upon it. INTEREST REDUCED ONE-HALF. Mr. WALKER. Assuming that the money made on its deposits by a bank with a capital of $100,000 was exactly equal to its expenses of every name and nature, including the current redemption of its currency notes, if it has any, and assuming the bank has no currency notes to issue and has its $100,000 funds equal to its capital loaned to customers on notes, each having three months to run and discounted at the rate of 6 per cent per annum, the net profit on its business would just equal 6 per cent on its capital stock, would it not? Mr. FAIRCHILD. Its deposits pays its expenses Mr. WALKER. Of every name and nature. It has $100,000 capital to loan and no currency? Mr. FAIRCHILD. It will get 6 per cent, of course. Mr. WALKER. If it can take out $100,000 currency and keep it in circulation, it can make loans at 3 per cent and make the same amount of profit? Mr. FAIRCHILD. Exactly. CITY BANKS CAN NOT ISSUE CURRENCY. Mr. WALKER. Is it possible for city banks without branches to circulate very much currency-those banks whose business is what might be called a strictly city business? Mr. FAIRCHILD. It is not. Mr. WALKER. Practically it can circulate none; it comes back in the clearing house the next morning? Mr. FAIRCHILD. Yes. TAXING CURRENCY OBJECTIONABLE. Mr. WALKER. Is not this 2 per cent tax on currency between 60 per cent and 80 per cent, in view of what I have said about Vermont and Virginia, a restriction working a hardship, and does it not work exclusively to the expense and hindrance of the circulation in country districts, where they actually need considerably above the 60 per cent? Mr. FAIRCHILD. I think that is the objection to it. That is my objection. BANK LOSES INTEREST ON BOND-SECURED CURRENCY. Mr. WALKER. Where currency is issued as it is to day, does not the bank actually lose on each dollar of currency not in circulation an amount equal to its rates of loans and discounts, less the profit the bank would make were all its currency notes in circulation? Mr. FAIRCHILD. Yes; that is true. Mr. WALKER. Does not any system of currency that makes the currency held in the vaults of a bank an actual loss to the bank under any circumstances compel the bank to increase the loan and discount rates to the people to an amount equal to the losses made on the currency that it holds in its vaults? Mr. FAIRCHILD. It does. UNITED STATES BOND-SECURED CURRENCY A "PER CENT RATE CURRENCY." Market price of United States 4 per cent bonds of 1907. This table shows that the 4 per cent bonds of 1907 bonds average to sell at prices to the purchaser in 1889, per cent Average to pay at prices sold for during 1887, 1888, and 1889, three years - per cent.. From 1883 to 1892, the eight years previous to the panic of 1893 ... - per cent.. Note circulation of national banks in 1881 2.095 2.292 2.462 $312, 223, 352 126, 323, 880 123, 915, 643 212,023, 386 |