nominations below ten dollars. If notes of the Reserve Association are to be issued as fast as national bank notes are retired, and in the same denominations, they would take the place of these notes in the circulating medium, and the entire untaxed or low taxed issue, or nearly all of it, would remain permanently in circulation. If it should seem desirable considerably to increase the gold element in our circulating medium, there is no good reason, unless it be an overabundant supply of the yellow metal, why the void caused by the retirement of our national bank notes should be wholly so filled, and why the entire future increase in our demand for hand-tohand money in denominations of from one to twenty-five dollars shall take the form of gold currency. The issues of the proposed Reserve Association might well do a part of this work. If it is desirable that they should, it is doubtful if the amount of untaxed or low taxed issues provided by the Aldrich plan is large enough.

It may be that Senator Aldrich contemplates the supply of an emergency circulation of bank notes only. In that case his plan is open to the criticism of inadequacy. Unless a Reserve Association or Central bank is so organized as to supply the elastic element now lacking in our currency system, many people will not consider it worth having. A much simpler and less expensive scheme could be devised for the supply of an emergency circulation. Furthermore, if we are to have such an institution, it could without serious difficulty be made to perform this function as well as others.

If the country banks should not generally purchase stock in the new institution, it is questionable whether that feature of the plan which contemplates the division of the country into fifteen sections and the location of a branch in each section would prove to be workable. The reserve cities are not properly distributed for the working out of such a scheme. Since, according to the plan, the minimum capital for a local association is placed at $5,000,000 and the district is to consist of a group of local Associations, there would probably be only one branch on the Pacific Coast, two in the region between the Mississippi and the Coast, one in the South, and three or less in the Middle West. The rest would be in the East. Everywhere, except possibly in the East and the Middle West, the distance of banks from the nearest branch would seriously interfere with the establishment of such relations as are necessary, if the central institution is to play an active part in their daily affairs. If it is not to play such a part, then it will become an emergency institution only.

Not only the scheme for branches but also other features of the plan suggest the possibility that it might develop into an emergency institution only. One of these is the limitation of its operations to national banks without permitting any modification in existing reserve requirements other than those which have been mentioned. The central banks of Europe owe a considerable part of their business and their power on the money market to the fact that other banking institutions are permitted to count bankable paper as reserves. These latter institutions ordinarily carry very small amounts of cash, relying upon rediscounts or call or short time loans on this kind of paper as collateral for the replenishment of their supply as needed. The presentation of such paper to the Central bank for discount is thus a regular daily proceeding and every banking institution is obliged to put itself into direct or indirect connection with the Central bank in order to supply its cash demands, the alternative being the keeping on hand of idle funds. Under present reserve requirements our national banks are obliged to keep idle funds on hand and under the Aldrich plan, to the extent that they would use the Reserve Association as their reserve agent, the amount of such funds would be larger than at present on account of the fact that they would receive no interest on their balUnder these circumstances would they not make the minimum possible use of the Association, and would that not mean that they would use it only in times of stringency, ordinarily transacting their business as they do now?

ances.

If, so far as the banks are concerned, the Reserve Association should prove to be simply an emergency institution, would it function properly and would it answer our purposes? Under such circumstances its resources in ordinary times would consist chiefly of the funds paid in by the stockholders and deposited by the Government. The amount deposited by banks would be the minimum permitted as a condition of doing business and probably would not be large. For the investment of these funds there would be available the bonds of the United States, the States, and foreign countries, and such foreign and domestic bills and commercial paper as the Association might be able to induce banks to sell it and as it might purchase on the open market in foreign countries. The only efficient inducement it could offer banks to sell would be a discount rate so low as to leave them a fair margin of profit on the transaction. Such purchases would amount to loans to the banks at a low rate of interest. What profits would be under these conditions can

only be conjectured, but there is a strong probability that they would be small, possibly, and it seems to me probably, so small as to reduce dividends considerably below five per cent. In that case the discrepancy between the earnings of the capital of banks invested in the stock of the Association and what it might produce otherwise invested, would weaken considerably the desire of banks to retain their stock and remain parts of the system.

It would not be safe for the Association to tie up any considerable portion of its resources in bonds, because in that case it would find difficulty in liquidizing them on the occasions on which its services as an emergency institution would be needed. Practically then, in ordinary times, the Association would serve as a middleman for the loaning of a part of its capital, the deposits of the government and that fraction of bank reserves left on deposit with it, to the banks at a low rate of interest. The liquidizing of these resources in times of emergency would take from the banks funds available to them previously at a low rate of interest. These would then be reloaned to them at a higher rate, a proceeding which would not increase their aggregate resources. The only special assistance the Association could render would be through its note issues. It may be maintained perhaps, gold importation aside, that this is the only possible method by which a central institution can under any circumstances increase the funds available for other banks. This is true in a sense, but there is a difference between taking funds from the banks with one hand and giving them back with the other, and taking funds from the open market and loaning them to the banks. In the one case the central institution operates only after the banks have assumed obligations relative to the market; in the other it is in a position to arbitrate between the banks and the market, the power of control remaining in its hands.

Relative to this matter of control it should be noted that the influence of the proposed institution on the rate of discount would probably be very slight. In ordinary times it would be nil, since the Reserve Association would be a suitor at the doors of the national banks for investments for its funds and would be obliged to accept the terms they might impose, terms which would be dictated by the market rates. In times of actual or threatened stringency, the tables would turn and the banks would be suitors at the door of the Reserve Association, thus temporarily throwing the control into its hands.

Upon this question of control of the market that feature of the

Aldrich plan which pertains to state banks and trust companies has a bearing. These institutions are not to be permitted to establish direct connections with the Reserve Association, but similar institutions organized under federal auspices are to have this privilege. The hope of Senator Aldrich doubtless is that under the conditions proposed state banks and trust companies would exchange their state for national charters. Is such action probable? State pride and the tendency already manifested by the states to develop their systems along independent lines would be opposed and might result in still further widening the gap between the two systems. In that case we would more closely approxmate financial chaos than at present, and the influence of the Reserve Association on the rate of discount and in every other respect would be much less than it ought to be if it is to meet the needs of the country.

Persons who suspect that any measure proposed by Senator Aldrich must necessarily be designed to play into the hands of "the interests" will look for a joker in his plan for the management and control of the proposed institution. They will have considerable difficulty, however, in finding it. Wall Street could control the new institution only by absolutely controlling a majority of the banks that will purchase stock in the new institution, and even then its control would be tempered by the influence of the Federal Government and of the representatives of the commercial and industrial world provided for in the scheme. The influence of the Federal Government will be great. The governor and deputy governors are to be appointed by the President, but from a list selected by the board of directors, which list could of course be dictated by Wall Street, if it should control the board. But the power of appointment and removal would give the Government a great advantage in any conflict of interests. The Secretary of the Treasury, the Secretary of Commerce and Labor, and the Comptroller of the Currency are to be ex-officio members of the board of directors, and the latter, as well as the governor and deputy governors, also members of the executive committee. If any criticism is to be passed upon this feature of the plan, it is not the extremely remote possibility of the undue influence of Wall Street but its complexity and cumbersomeness. What kind of a management such a plan would produce it would be extremely difficult even to guess.

In discussing this plan one must not forget that any practical scheme for a central bank must be adapted to actual rather than

ideal conditions. Its design to complete and perfect our present national banking system rather than radically to modify it is commendable. It was doubtless with this in mind that Senator Aldrich proposed to confine the operations of the Reserve Association to the national banks and to avoid the possibility of competition with them. But an institution, with free access to the open market, with the privilege of establishing connections with state banks, trust companies, and other financial institutions and even with private persons, might become the head of our entire banking system, and, in so doing would more efficiently serve the national banks and would tend to weld together, rather than force further apart, our state and national systems. If, in addition to thus broadening the scope of the Reserve Association, our national banks should be permitted to count bankable paper as a part of their reserves, and the Reserve Association should be given the privilege of establishing such branches as experience should determine to be necessary in order properly to serve its constituents, and if its loan operations, as Senator Aldrich proposes, be confined to the highest grades of short time bills and commercial paper, national banks would find it clearly in their interest to purchase stock and connect themselves with the new Association, and the amount of competition they would experience from it would be a negligible quantity. WM. A. SCOTT.

University of Wisconsin.