« AnteriorContinuar »
connection at present existing between our central reserve system and the stock market, and would remove it from the control of Wall Street. The privilege of accepting bills for customers, if generally made use of by national banks and business men, would create a new form of commercial paper of high grade, the so-called bankers' bill, and the rediscount privilege provided by the plan would create a ready market for such bills, thus enabling national banks to liquidize a considerable portion of their reserves at any and all times. Since the proposed institution is to be the depository and banker of the government, the evil effects of our present independent treasury system would be avoided.
The query raised by a study of this plan is whether it will actually "work out" in the manner indicated. In this connection it will be well to determine first of all what banks are likely to take advantage of it, if the privilege is offered them. No form of compulsion is proposed. No bank is to be compelled to buy stock in the new concern, or to sell bonds to it or to use it as a reserve agent. Whether or not a given bank will enter the proposed system seems, therefore, to depend entirely upon the strength of the inducements offered. These are four in number: the discount privilege; that of counting balances as reserves; that of securing transfers between the different branches and between the branches and the central institution at Washington; and that of obtaining shipments of notes from the bank or its branches without expense. As offsets to these inducements must be counted the loss of interest now paid by reserve agents, the new institution not being permitted to pay interest on balances; the necessity of tying up twenty per cent of the capital in the stock of the Reserve Association; and the fact that the maximum dividends allowed, five per cent, are below the earnings of the capital of many, if not most, banks on the investments into which they would otherwise put their capital.
How strong these inducements will prove to be, diminished as they must be by these offsets, can only be conjectured, but since the character and influence of the proposed institution depends almost entirely upon them the probabilities in the case must be considered.
In estimating the value of the privilege of rediscounting with the Reserve Association, banks will consider the frequency and urgency of the occasions on which they are likely to want to take advantage of it and the ease or difficulty and expense of availing themselves of it. In this connection experience will needs be their chief guide.
What will that teach? In the case of most banks, especially those outside the reserve cities, that in ordinary times they will rarely need it, but that on extraordinary occasions, such as a crisis, the possession of it would save them much anxiety and that its occasional use would, therefore, be probable; in the case of banks in the reserve cities, especially those that carry large bankers' balances, that its use in the spring and fall, at the beginnings of the quarters and on other occasions when the demands upon them for currency are above the average, would also be advantageous. Reckoned in dollars and cents the value of this privilege to any bank would be the interest on the idle funds it would otherwise need to hold in order to meet the varying and extraordinary demands made or likely to be made upon it. With the rediscount privilege banks could safely hold bankable paper for these purposes instead of idle funds.
The cost of using this privilege, reckoned in time, trouble and money, will count as an offset to the value placed upon it. In the case of country banks this will be rather high. In the first place only short paper can be used and the amount of that available to them is relatively small. In the next place they must establish, to the satisfaction of the officers of their local association, the high character of the paper submitted and for this purpose they will lack in most cases the detailed statements and other data which large banks in commercial centers, having well organized credit departments, possess. They must also pay a fee for the endorsement of the local association. Their distance from the seat of their local association will also serve as an obstacle, as well as their distance from the nearest branch to which the paper must be sent before any returns on it can be secured. Since there are to be only fifteen branches for a country so large as ours, these distances are bound to be considerable in most cases.
In the case of most, if not all country banks, it seems not improbable that these costs will nearly or entirely balance their estimate of the value of this privilege. It is also highly probable that under the new regime their correspondents in the reserve cities would be able and willing to offer them rediscount privileges which would be more attractive than those at the disposition of the proposed Reserve Association. For the banks in the reserve cities the balance of advantage in favor of making use of the Reserve Association would be considerably greater.
The value of the privilege of counting balances with the Reserve
Association as legal reserves will depend very much on the policy pursued by the new institution relative to collections. That policy will needs be considerably more liberal than the one pursued by their present reserve agents in order to induce country and reserve city banks to transfer their balances. By such transfers they will lose two or more per cent interest at present received. In all probability whatever terms the new institution makes regarding collections will be duplicated by existing reserve agents in order to hold their bank customers. If, then, banks generally make use of this privilege at all, it will be because no limit is to be placed upon the amount of such balances they can count as reserves, whereas now country banks can count balances with their reserve agents only to the extent of three-fifths, and reserve city banks to the extent of one-half, of their legal reserves; or because the other inducements offered are great enough to counterbalance the loss of interest involved. The advantage of carrying a balance with the nearest branch of the Reserve Association instead of cash in the vaults will not be great under ordinary circumstances, except in the cases of large banks located in the same towns as the branches or very near them. In the case of banks in the central reserve cities the advantage of being able to shift the responsibility of meeting the demands for cash now made upon them from all sections of the country would be great enough to make it worth while to keep large balances with the Reserve Association; and it is also probable that the sum total of the advantages in being a part of the new system would induce the reserve city banks to do likewise, but it is hardly probable that the country banks would find it profitable to do so.
If the new Association could actually maintain branches in every one of the fifteen sections into which the country would be divided, it would have an advantage over any of its competitors in the capacity of transfer and collection agent. It could then easily and economically serve as a clearing house for the entire country, and drafts upon it would speedily acquire universal currency. The obligation imposed by the Aldrich plan of sending its notes free of charge upon demand to any bank having a balance with it would also give it an advantage over competitors who now compel customers to pay the cost of currency shipments. It is probable, however, that banks in reserve and central reserve cities, who now perform these functions to the satisfaction of their banking customers, would meet the competition of the new institution along
these lines, even though it would involve expense and a consequent lowering of profits.
The above considerations strongly suggest the probability that the country banks would not in large numbers take advantage of the opportunities offered by the plan. Without materially changing their present connections they would indirectly reap advantages from it by securing from their present correspondents rediscount privileges and better terms in respect to collections and currency shipments. Confined in its operations to banks in the reserve cities and to a few others outside, who do a fairly large business in bankers' balances, the query arises whether all the features of the plan could be carried out. In this case it should be noted that the capital of the Association would be about $80,000,000, assuming that all the national banks in all the reserve cities would purchase stock. With that amount could it safely assume the obligation placed upon it of offering for the period of one year to purchase the two per cent bonds now held by national banks? According to the report of the comptroller of the currency for Oct. 31, 1910, these amounted to $580,145,400. If all these should be offered for sale within the year, it is obvious that the Association could pay for them only by using, in addition to its capital, funds left with it on deposit. After the lapse of a sufficient amount of time to permit the retirement of the bank notes now issued against these bonds, the notes of the Association would also be available; but in the mean time a considerable portion, and unless they should be much larger than could be reasonably expected, a large portion of the deposits would be tied up in bonds, which according to the plan could not be sold until after the lapse of two years and then only at the rate of $50,000,000 a year and with the consent of the Secretary of the Treasury. During this interval might not the Association become seriously embarrassed for cash? Even after the notes of the Association had gone into circulation in place of the national bank notes, might not some embarrassment be occasioned by demands for redemption, the Association being powerless, on account of the bonds, to regulate the volume of its issues in accordance with its cash or other resources?
Some other aspects of the note issue feature of the plan may appropriately be considered at this point. Provision is made for the purchase only of the two per cents held by the national banks as security for circulation. It is not made quite clear whether the amount of these bonds so held and purchased is to be the measure
of the amount of notes the Association is to be permitted to issue without payment of a tax of at least 3 per cent, or whether the total issues of the national banks at the time the new Association shall begin operations is to constitute such measure. In either case the query is pertinent whether the untaxed or moderately taxed contingent is placed at a sufficiently high figure. In the one case it would amount to about $600,000,000 and in the other to about $750,000,000. The answer to this question will depend upon the part it is designed that bank notes shall play in the future of our monetary system. Shall we depend upon them for the supply of the elastic element in our currency or upon the foreign gold movement or upon both? It is not probable that the foreign gold movement can for a long time, if ever, be our main reliance for this purpose. Our distance from Europe as well as the nature of our foreign commerce and the differences between our credit system and those of Europe will always interfere with its efficiency in this respect. Our Reserve Association could never reasonably expect to rival the Bank of England in its command over the world's supply of gold.
If bank notes must be chiefly relied upon, it is doubtful if the amount of the untaxed contingent suggested in the Aldrich plan is adequate. It should be remembered that it is upon this portion of the authorized issue that we must depend for this purpose. The tax of three per cent or more to be levied upon issues above this amount would be prohibitive except on occasions of rather extreme stringency, and it is for the purpose of avoiding such occasions that an elastic element in the currency is desired. The bank notes at present in circulation constitute a part of the amount of hand-to-hand money needed at all times, those of minimum as well as maximum demand, and unless some other provision is made for supplying their place, the untaxed or low taxed notes of the Reserve Association would be employed and few, if any, would be available to supply the extra seasonal and other demands.
It is, of course, possible that the place of our national bank notes might be wholly or partly filled by gold and, perhaps, this is Senator Aldrich's intention. But the void would not thus be filled unless special provision were made for it and that the plan does not provide. According to the experience of other countries such provision would have to be made by prohibiting the issue of notes below the denominations of twenty or twenty-five dollars, and, probably, by authorizing the issue of gold certificates of de