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lection and payment of debts? It is because the breakdown of credit stops the movement of commodities, and there are no sales of cattle or grain against which to draw exchange. Nor is there any place where balances can be created by the sale of trade paper. That is all we ever need to keep domestic exchanges open. All our cities had plenty of trade paper in 1907. If they could have sold it for book credit or for credit notes, country merchants could have paid city merchants, city merchants could have paid the manufacturers, the manufacturers could have paid wages, and so have prevented the death of industry. The breakdown of credit must be hereafter impossible. The Reserve Association of America will provide modern industry with that which alone will assure its continuity; a reserve of credit, coöperative, unified and practically unlimited.

Other Features

It would be interesting to consider other features of the plan under discussion, the provisions for branches of the Association abroad, and the investments permitted in foreign bills and in bonds of foreign governments. It would be of interest also to compare and contrast the scheme of the Associations, local, district and Reserve, with the organization of agricultural credit in France and Germany, and perhaps with some of Mr. Fowler's suggestions. The arrangements we thus pass over make the Reserve Association a complete and sufficient institution, and foreign analogies give to the new American project the authority of success. Nor, although they are wise, can we consider here the suggestions for new classes of national banks, some to do business abroad, others to receive savings and make loans on real estate, others to be in effect national trust companies. If worked out in detail and adopted, these proposals would give us institutions of wider scope and usefulness than similar institutions we now have operating under the laws of one or the other of the states, and so necessarily restricted in scope. We must pass over, too, the provision for the establishment by a national bank of branches in its own city. This is a most useful provision. In most cities not even state banks can establish branches, and there are centers of trade one, two or three miles from the post office that have not the banking facilities that exist in country towns of one hundred inhabitants.

It remains to consider a few specific criticisms and suggestions that have been made since the publication of the plan.

Suggestions and Criticisms

Some opponents have discussed the plan as if the Association were an organization to monopolize credit, with resultant power to oppress industry. It is nothing of the kind. It is an Association of individual banks to increase the facilities of the banks that join, who will, of course, use the increased facilities to aid industry, not to oppress it. There will be changes of detail, of course. It is unnecessary financially, and probably impossible politically, to limit the number of branches of the Reserve Association to fifteen. Business conditions would, for instance, make the establishment of a branch in Kansas City imperative, but Kansas City is in point of population only the twentieth city in the country. Rivalry between cities and between states is such that the number of branches will have to be considerably increased above the fifteen originally proposed.

The question of division of profits between the stockholding banks and the government, and the related question of maximum surplus to be accumulated, will be much discussed. The provisions as they stand are that after the stockholders have received four per cent dividends, cumulative, one half the remaining profits shall go to the surplus of the Association, one fourth to the government of the United States, and one fourth to the stockholdng banks. After the stockholding banks have received five per cent dividends, however, one half the remaining earnings go to the government, and one half to the surplus. The surplus, however, is not to exceed twenty per cent of the paid in capital, and when it stands at that figure, all earnings above the five per cent dividend go to the government.

While at first thought it may be strange to limit to five per cent the profits that can ever be received by the banks that subscribe to this great Association, organized for the public good, the restriction is necessary. Without it, we should sometimes see an ambitious board of directors operating the Association for profit, carrying too much sail in time of threatened storm, adopting the theory that the banks and business interests of the country must themselves exercise the necessary foresight, and that if they failed to do so it was no fault of the Reserve Association, as long as the Association kept its loans and discounts good. It is not the object to establish another great money making bank in this country, but to create an Association of the existing banks that shall be under no

temptation, shall indeed be without the power, to make much money for its members, and, therefore, free and sure to grant or withhold its facilities as in a given business situation may seem best.

So, too, the surplus must be limited. Twenty per cent may not be a better limit than fifteen per cent or thirty per cent, but a limit there must be, and it should not be large. If it were possible for the institution to accumulate a surplus of one hundred per cent, we should hear the banks asking for dividends of five per cent on the whole, or ten per cent on the amount actually paid in by them. They would either get the increased dividends, which would involve some of the possibilities of trouble just pointed out, or some of them would withdraw from the Association, taking out the book value of their stock, and so weakening the Association financially and numerically.

State Banks and the Association

The suggestion heard recently, that state banks should be admitted to membership in the Association and given its facilities, is unwise. If the foregoing analysis of where the benefits of the Association would lie has been correct, the admission of state banks is entirely unnecessary. Few of them have great business with country banks. If they cared primarily for such business they would already have reorganized as national banks. They all have accounts now with large national banks, and depend upon them for assistance in times of stress. With the power of these national banks to render assistance greatly increased by the organization of the Association, it is unnecessary to give the state banks duplicate facilities, and it would certainly be unwise to introduce into the Association a class of banks that, however good their local supervision may be, are still outside the restrictions imposed by law upon the investments of national banks, and outside the supervision of the Comptroller of the Currency.

Perhaps those restrictions and that supervision could be extended to such state banks as might wish to become members of the Reserve Association, but they would just as soon reorganize as national banks and have done with it. But not many of the country banks will reorganize; they are either too small, or they need the greater liberty of investments. In the cities, however, some state banks may become national savings banks, if such banks are authorized, and thus save their right to lend on real estate. The trust companies, too, would almost all nationalize.

Many of the large state banks, whose commercial business and business from country banks constantly increase, will be converted into national banks for the prestige of membership in the Reserve Association, and for the possibility of increased discount facilities. The Association will thus considerably increase its membership and business by the admission of banks and trust companies leaving state systems for the national system. Taken the country over, however, the movement to convert will not be a wholesale one. We still need our state banking systems.

The plan now before the American people for consideration will enable our banks to place funds at any point where they may be called for by business or by occasional stress. The step bankers must take to carry out this plan is so short and natural that one is almost surprised that it has not been taken before. The plan does little but legalize what bankers have in the past managed to do very inefficiently with their existing, scattered organizations, and it gives to these and like organizations a means of coming together for the common good. The adoption of the plan fundamentally as it has been presented would make American banking a more stable occupation, and greatly increase its usefulness in the development of the American continent.

Kansas City, Mo.



Senator Aldrich's plan has the merit of suggesting remedies for the most fundamental defects in our currency system, namely: its lack of elasticity; the uneconomical use of banking reserves, their connection with the stock market, and their control by Wall Street; the lack of a ready and sure market for first class commercial paper through which banks can liquidize their best resources at any and all times; the lack of a form of commercial bill which bears on its face evidence of its character and genuineness; and the disturbing influence of our independent treasury system. The means proposed to remedy these defects are the following:

A central institution in Washington, with fifteen branches, situated one in each of fifteen districts into which the country is to be divided, endowed with the following rights and privileges: (1) that of gradually absorbing the present issue privileges of the national banks, of ultimately securing these issues by legal currency and first class commercial paper instead of bonds, and of issuing additional notes secured in the same manner on the payment of a graduated tax; (2) that of serving as reserve agent for national banks, of rediscounting for them high grade commercial paper of short maturity and of transferring funds for them between the main offices and the branches or between the branches; and (3) that of serving as depository and banker for the federal government. It provides that this institution shall be under the joint control of the officers and directors of national banks, the federal government and the various business interests of the country, with the balance of power in the hands of the national banks. It also provides that national banks be given the right under certain restrictions to accept bills for their customers, and that two new classes of national banks be authorized endowed with privileges approximating those now possessed by state banks and trust companies.

If such an institution should succeed in becoming the sole bank of issue in the country, under the conditions proposed, and the reserve and transfer agent for the national banks, it would be in a position to supply the elastic element now needed in our currency, and it would greatly increase the efficiency of our banking reserves. The basing of issues upon commercial paper and the placing of control in the hands of the government and the banks would sever the

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