CHAPTER XI

THE NATIONAL BANK SYSTEM. BANKING SYSTEMS

OF SOME OTHER COUNTRIES

I. THE NATIONAL BANK SYSTEM

Explanation. The national bank system has the sanction of the United States government. It is the system that now obtains in this country as contrasted with the single bank system which obtains in other countries.

It may be asked whether it would not be better to replace the system now in use by the single bank system, which has been tried already on two occasions in our history. That the first United States Bank was a success, there can be no doubt. The second United States Bank showed that, if politics had been eliminated, it too would have been a success. Under this single United States bank system, the government was able to negotiate its loans, to carry on banking business, and to regulate the currency of the country.

Under the present system, there exist many objectionable features which are indeed recognized, but which have hitherto been unremedied. That some more practical and efficient method of banking may be devised is the purpose of the National Monetary Commission appointed by Congress in 1908. The crisis of October, 1907, had shown the inefficiency of the present system in at least one particular, the circulating currency, and it became imperative that some remedy should be found.

Objections. The main objections to the present system may be summarized under the following heads: its Origin, the Isolation of the Several Banks, Depositing of Reserves, the Congestion of Money in Money Centers, the Independent

Treasury System, Inelastic Currency, and Lack of Banks in Many Districts.

The national bank system

the government's need of The government had need

Origin of the Present System. was the result of an emergency, funds and of a market for its bonds. of money to carry on the Civil War, and the state banks then in existence did not want the government bonds, which were fluctuating in value with every victory or defeat of the war. In 1863 the national banks were established with the obligation of taking a certain proportion of the government bonds.

Indeed, the whole history of banking in this country shows a sort of hit or miss process in the adoption of schemes, nearly all of which have missed their object. A truly sound banking system ought to be the result of a selective experience. Such has been the method pursued by Canada, where the existing banking system is the result of long and careful investigation, and the exchange of views of the prominent bankers of that country.

Isolation of the Several Banks. Each bank is an independent unit, having its own interests distinct from the interests of all other banks, competing with its neighbors, and often ready to save itself at the expense of its neighbors. There is no union whereby mutual support and aid might be extended from the stronger to the weaker in time of trouble. There is no community of interests that would serve to bind all together in one perfectly consolidated system, making the interests of one the interests of all, and inciting each to watch over the honor and integrity of the others.

Owing to this isolated character of the banks, a scheming operator may have his notes discounted in different banks, without any one of the banks knowing about the accommodation granted by the others. A business concern that failed in recent times for many millions of dollars had its paper in many different banks in the East and Middle West and even as far west as the state of Washington.

When one bank, becoming aware of the flimsy nature of the

security offered, calls in its loan to a borrower, the borrower may pay back the loan with money borrowed from a second bank on similar uncertain security. Usually the first bank cares very little where its money comes from, and is equally unconcerned about the risk incurred by the second bank, which may also grant the loan on unsafe collateral.

Again, in time of stringency, each bank seeks to draw in its own reserves, and in doing so it often exposes to imminent danger other banks that hold these reserves. Each bank will seek its own salvation, and will strive to increase its cash fund at the expense of every other bank.

A writer, referring to the action of our banks in the money troubles of 1907, says: "The 25,000 banks were so singularly unrelated and independent of each other, that the majority of them had simultaneously engaged in a life and death contest with each other, forgetting for the time being the solidarity of their mutual interests and their common responsibility to the community at large. Two thirds of the banks of the country had entered upon an internecine struggle to obtain cash, had ceased to extend credit to their customers, had suspended cash payments, and were hoarding such money as they had." (A. Piatt Andrew, in Annals of the American Academy of Political and Social Science, Nov., 1910.)

This scramble for money to keep up reserves is not seen in any other country. In other countries there is a unity of system, a central bank which holds the reserves of all the banks. In England, the Bank of England holds the reserves of all the other banks, and it alone must see to it that these reserves are on hand when an extraordinary demand is made by its creditor banks. All the banks are creditors of the Bank of England, but no other bank save the Bank of England is indebted to any other bank.

Reserves.

At present, the reserves of country banks may in great proportion be placed in Reserve City banks, and the reserves of Reserve City banks may be placed in Central Reserve City banks. This system will present no serious difficulty in

1

an emergency or a money stringency which would affect only a portion of the country or the banks of one city. In such a case, if a country bank in one town needs money, it may call on the reserve it has in the Reserve City bank, and the money will be forthcoming and the difficulty will be tided over. But if the stringency affects a whole section of the country or the entire country, then, when demand is made by country banks, the Reserve City banks lose much of their deposits and become so much weaker. They in turn call on the Central Reserve City banks for the portion of their reserves deposited there, and the · Central Reserve City banks lose much of their deposits and become so much weaker. Thus the weakening process continues until the whole banking system is affected.

Indeed, that the reserves deposited in other banks cannot properly be called reserves at all is asserted by a recent authority on the subject of banking. The panic of 1907 illustrated this fact. "The Western banks, having large deposits in New York banks, began to draw against the latter, thereby diminishing the reserves of the New York banks; but, as the latter needed their own reserves quite as much as the Western banks needed theirs, the money stringency in New York soon reached the breaking point, and all the New York banks suspended cash payments. From the moment that such suspension took place, the deposits of the Western banks were of no use to them as reserves." (M. W. Hazeltine, “The Banking and Currency Problem in the United States," in North American Review, Feb., 1909.)

The keeping of reserves in other banks is styled by one writer "one of the most dangerous features of American banking in times of extreme panics." (A. B. Stickney, in Practical Problems in Banking and Currency, ed. Hull, p. 212.)

Congestion of Money in Money Centers. The reserve law which allows banks to deposit a portion of their reserves in other banks causes a congestion of money in great money centers, and leaves the country banks devoid of the funds necessary to carry on business. These reserves deposited in other banks

bear interest, and it is to the advantage of the country banks to deposit their money in the reserve banks, but the result often follows that business men in those country communities find it difficult to get the credit necessary to do business.

A view of the per capita capital existing in the various states at any one time will illustrate this fact. In 1896, the per capita capital in the national banks in several states was as follows:

(Cf. Handy, Banking Systems of the World.)

It is true that since 1896 there has been an increase in the number of national banks, the lowest amount of capital stock required having been reduced from $50,000 to $25,000. Yet the evil exists even to-day to no small extent.

The Independent Treasury System. The treasury system adopted in 1846 and persisting under the present banking system allows the United States government to store away in its main treasury vaults in Washington and in the subtreasuries throughout the states a great mass of its wealth. The proceeds of taxation are thus abstracted in great measure from commercial uses. The people are deprived of the use of the money. This system has been called a "revival of primeval times," when the barons stored their wealth in their castle vaults. The amount of money thus locked up and kept out of circulation has averaged in past years $50,000,000. Had this sum been deposited in the national banks instead of being kept in the treasury vaults, it would have been no less safe, for it might be secured as the government deposits at present placed in the banks are secured. Had the government received even a 2 per cent interest on those sums, it would have been benefited to the amount of millions of dollars, and the banks would have had at their dis