was only 24.2 per cent. of the net banking liabilities; the balance. of the amount of "cash" on hand to support outstanding accounts, and to meet the 25 per cent. legal requirement had been borrowed. Judgment of Bankers as to whether Present Capitalization is Adequate. If, on the other hand, we take the judgment of bankers as to what equipment is necessary to the safe conduct of their business, another result will be obtained. For this purpose it may be assumed that a banker will keep no more "cash" on hand than safety to his business requires; if he does he is violating good business judgment. The same may be said of "exchange accounts" and of investments made in low income-producing assets from which "cash" may be realized by quick turns to support credit accounts. Assuming further that the principle is a sound one, that such assets as are permanently employed, or are continuously needed in the business, should be procured by direct investment of capital (i. e., that a business concern, especially a bank, should not obtain its equipment on a "floating debt"), then the inadequacy of capital measured by the standards set by bankers themselves increases as we proceed from periphery of the National Banking system towards this center. To exhibit this in tabular form, the result of failure of the law to require such control as will prevent the overtaxing of capital resources, and such as will insure that our commercial banks do business on their own capital, would appear something as follows: COMPARATIVE STATEMENT OF EQUIPMENT ACTUALLY USED BY THE SEVERAL CLASSES OF BANKS-STATED IN MILLIONS OF DOLLARS. In the above, question is raised as to several classes of items. Without specific inquiry in the form of report required as to the amount which a bank carries for "exchange accounts," this must be approximated. The approximation here given, however, is a deduction from "Loans to Reserve Agents" (another account which is carried as an invested reserve for the purpose of supporting the cash reserve) and, therefore, one which should be capitalized. As to the "securities held," in so far as they are not held as reserve equipment, they are not a banking resource and like "real estate" are in the nature of an encumbrance on banking capital. Such assets must be either for support to bank credit or for direct investment. In either case the bank should not buy bonds on credit. Taking the charges against capital as they stand and the redemption equipment actually used, we find that for the United States, in the judgment of bankers themselves as reflected in practice, the banks should have provided $405,000,000 more of capital to support their business. That is, to properly support $4,392,000,000 of credit used in the course of bank operations to purchase $4,392,000,000 of income producing assets, the equipment which was actually used should have been provided by the proprietors of the business. Such a provision would require an increase of 31 per cent. in total bank capitalization. But further inquiry would show that all but 9 per cent. of this gross amount would be required of the reserve cities, and that a very large portion of the increase is needed in the city of New York. Inadequacy of the Reserve Requirements. Again I wish to affirm the position before taken-that this is not proposed as a true method of analysis to get at the relation of intensity of credit strain to equipment used. Attention is directed to the fact only that such an element should be taken into account in reports, the purpose of which is to furnish the data for official control. Further, it is suggested that no provision is made in the present form of report for ascertaining these data; and only one provision of law is made to protect the public against any overtaxing of capital equipment. This one provision referred to is the clause which imposes a minimum limit in money reserve to be kept. Drawing on experience and on the expression of banking opinion in legal form in State practice before adoption of the National Bank Act, the minimum money reserve to be kept by country banks was set at 15 per cent. of credit accounts outstanding, and for reserve city banks, 25 per cent. This clause was modified, however, under pressure from the banks, so that in estimating the amount of cash on hand three-fifths of the 15 per cent. money reserve of country banks might consist of loans to reserve city banks, and one-half of the money reserve required of reserve city banks might consist of loans to central reserve city banks. This limitation imposed does, in fact, operate to prevent some of the least provident bankers from bringing their houses down. on the heads of customers, and precipitating a panic in the business. community. Nevertheless, the provision is entirely inadequate to prevent an overtaxing of equipment. To illustrate one of the methods used for complying with the law and at the same time for carrying a load that keeps the institution on the verge of credit collapse: From the published reports it appears that a number of banks have individual deposits outstanding amounting to from ten to twelve times their capitalization. Some of these banks continuously carry a cash fund larger than their capital stock, surplus and undivided profits. Where did they obtain this money? Undoubtedly they borrowed it. In several instances, only about onethird of the equipment constantly used by these banks is provided by means of capitalization; the balance is obtained on demand loans. Imagine another enterprise being financed in this manner! The Present Condition not the Fault of the Banker but of the Bank Act. I am not finding fault with a bank for doing business in this way. If a banker finds that he may obtain capital from others with which to do business and that, when a sudden demand comes for payment, he can force his commercial customers to find the means necessary to replace the temporary foundations withdrawn, if by such methods the banker may be able to keep his own house from falling on the heads of managers and stockholders, he may be exonerated on the principle that he has availed himself of a business advantage which has brought a large return in profits. But the purpose of control is not to protect the bank. From the point of view of the purpose of pubiic control we ask the question. "What is the result of this character of banking to the commercial community?" As a national system this is simply another form of wild-cat banking and it is in this very practice that we find much of the trouble that heretofore has been ascribed to inelasticity of the currency. The prime fault is in a law which permits bank capitalization inadequate to maintain the volume of bank credit offered to the community with which to do business and of which customers have availed themselves. This being suddenly withdrawn to protect the bank from its own weakness, the community is left in a crippled condition to shift for itself. One of the purposes of control should be to secure a better co-ordination between the volume of credit accounts sold and capital equipment provided as a means of support; to this end the National Banking Act needs revision. But having been revised so as to give the Comptroiler power to exercise supervision to prevent the overstraining as well as the "impairment" of capital equipment, the present power to compel reports is sufficient to make this supervision effective. One of the two principal purposes of the Bank Act is to guard the integrity of our financial system and to protect the public against loss on account of inadequate capitalization. To effect the full measure of good intended by the Act, to vouchsafe a system of control which will secure "sound banking" as well as "sound currency," there should be added to the present powers which are intended to protect against an impairment of capital, inquisitory powers directed against an overloading of equipment. As a means of executing this authority, classified schedules should be devised which will furnish the information necessary to intelligent official discretion, and classified financial statements of results should be published, that the public may the more intelligently deal with the banks. |