NATURE AND PURPOSE OF H. R. 7837.

H. R. 7837 is intended to bring about necessary changes in the present banking and currency system of the United States and to correct long-standing evils that have had a slow and deep-rooting growth. It aims at the rectification of the essential defects of the present system, although it does not seek to make all the innovations that might, from an ideal standpoint, be deemed desirable.

DEMAND FOR ACTION.

There has for a great while been strong public demand for remedial legislation on banking and currency. This demand was partly obscured during the controversy regarding the adoption of a monetary standard. Yet even before the adoption of the act of March 14, 1900, there had been a vigorous popular movement directed to the amendment of the national banking act. This took form in various voluntary organizations and in actions by bankers' associations as well as by organizations of business and commercial interests. It was practically universally admitted from 1898 onward that one of the basic commercial evils of the day was the lack of a suitable banking system.

This view has been frequently reiterated and restated ever since the earlier days of the banking discussion to which reference has been made. Of late it has taken form in renewed agitation following the panic of 1907 and promises of action have been made in nearly every political platform, by whatever party adopted, within recent years. The call is loud and comes from many sources of widely divergent character.

It is probable that not a single scientific student of currency and banking could be found who would approve the conditions which now exist in the United States or the banking system under which they have sprung up. Nowhere in the world to-day can there be found a banking system similar or analogous to that of the United States, or a situation as to credit which could be compared to that prevailing in this country at the present moment.

REASONS FOR ACTION.

The considerations which thus dictate action upon the banking and currency question at the present time have often been stated and from many differont points of view. In the opinion of the committee there can be no doubt whatever with regard to the essential elements of the case. The general background of the situation which calls for banking roform is this: Half a century ago Congress, in the midst of a civil war, established a new system subsequently developed into the national banking system. The essential elements in this system were three in number: (1) The maintenance of the principle of free banking through the unrestricted organization of banking institutions; (2) the refusal to allow the extension of systems of banking throughout the country by the organization of branch banks; and (3) the adoption of a peculiar system of note issue

whereby the banks were required to buy a minimum of national bonds when chartered and subsequently to deposit with the Treasury bonds to protect all currency received by them for circulation. The different elements in this system will be fully considered at other points in the present report. It is enough now to suggest the goneral bearings of the case. This system has continued substantially unamended to the present time, and to-day includes some 7,473 banking institutions within its range. These banking institutions vary in size from $25,000 capital to $25,000,000. They are entirely local. The only bond between them is found either in mutual stock ownership or in the redepositing of reserves as they are permitted to do under the national-bank act. In view of the lack of any factor of unity the national banks have failed to furnish to the Nation as a whole a single and powerful system of credit. The strength of the credit situation in each community has depended upon the strength of the banks there situated, and, except in times of stress, has oven in these communities been measured by the strength not of the strongest, but of the weakest institution there located. In times of stress the banks of such independent communities have at times in self-defense united to place their combined rosources temporarily at the service of the public and of one another, but they have taken such action only under stern pressure. As a rule, they have been individualistic in the highest degree, and the country has lacked the capacity either to prevent credit disorders from breaking out locally and spreading to the centers, or to defend its own resources against the monetary demands of foreign nations or against the infection duo to bad financial conditions in countries with which we stood in close relations..

The evidence that this system has not done its duty is not found in dishonesty or failure. While at times failures have been numerous among the national banks, as must necessarily be the case in any system of numerous and highly individualized banks, the average record of failure or irregularity has been small. No noteholder has ever lost a dollar, and the losses of depositors constitute in the aggregate a very small percentage of the total deposits held by the banks. The country has been enabled to do an expanding business, to its own great profit. But the evil of the situation has been perceived upon all those occasions when unusual pressure was brought to bear upon the banks of the country. In 1873, 1884, 1890, 1893, 1896, and 1907, to mention the most familiar occasions, it has been necessary for large groups of banks practically to suspend specie payments. They have done so as the result of concerted action, and one feature of the situation upon each of these occasions has been a genuine effort to relieve conditions by resorting to an issue of obligations for which the banks became jointly liable, and which in some measure helped to overcome shortage of currency and the stringency that was associated with it. In spite of all that could be done, however, the public has been put to great inconvenience and loss upon such occasions, the relations of the United States with foreign countries have been embarrassed, if not brought into jeopardy, the failure of firms, corporations, and individuals has been necessitated, and the loss of wealth has been tremendous. We think it is axiomatic that

these conditions should not be allowed to repeat themselves, but that they should in some manner be relieved or prevented, if possible.

On the other hand, the national banking system, with its many merits, has not proved responsive to the seasonal needs of the community. At periods of exceptional demand for credit the movement of currency between various points, with attendant expense and delay, has been enormous, while the expansion of this currency has been slow and halting, local necessities being met by withdrawing circulating media from other regions. In consequence, the marketing of the country's annual crops has been slow, difficult, and expensive, and it has frequently happened that various sections of the Nation have been obliged to depend too largely upon the limited extension of credit to them by banks located elsewhere.

Conversely, it has been found that whenever the seasonal needs of credit in agricultural regions throughout the United States had been met and when the crops there produced had been fully disposed of there was an accumulation of currency, partly borrowed from other portions of the country, partly of local origin, which could not be used to advantage upon safe or sound security throughout the less active portions of the business year, and which was therefore shipped to banks in distant cities, that it might be there put to some cmployment that would yield its owners an income. It has not always turned out that the employment thus found for it was desirable or, on the whole, conducive to the good of the country.

NATURE OF EXISTING CONDITIONS.

Turning from the general considerations which tend to prevent the acceptance of existing banking conditions as satisfactory, there is need of a recognition of the immediate status of the financial and business world at the present day. There can be no doubt that for some time past the national banks of the United States have been in a difficult situation. The committee has been amply warned and advised of this state of things, and a general knowledge of it is common to the country at large, certainly to all close or careful observers of existing conditions. In the reserve centers to-day banks are unable to extend the credit that they would under normal circumstances be disposed to grant, while merchants are frequently unable to get the accommodation to which they are entitled. A general tendency toward stringency evidently exists, and while this is not peculiar to-day to the United States it should not be felt here in anything like its present severity, inasmuch as this country has not had to bear the burden of warfare and destruction of capital that has been thrown upon the European countries. All over the western world there is now a distinct shortage of capital, both fixed and floating, while our banking and reserve situation is anything but reassuring. Under such circumstances it is highly desirable that the utmost efficiency should be given to the reserve resources in the hands of the banks and that they should be enabled to do all that circumstances will permit in extending to the business world the volume of loans that it needs, so long as they maintain themselves in position to protect the accommodation thus granted. Legislation which will relieve this pending condition of pressure and possible panic, which will place

the banks in position to employ their resources to the best advantage, which will obviate the necessity of expensive transfers of funds between different parts of the country, and which wul furnish loans upon an inexpensive but absolutely safe basis was never more urgently demanded than it is to-day. It is this condition of affairs that has most strongly moved the Committee on Banking and Currency in its effort to press a measure of relief upon the attention of the House.

LACK OF PROTECTION AGAINST PANICS.

Reference has just been made to the fact that the national banking system, among other defects, fails to afford any safeguard against panies and commercial stringencies or any means of alleviating hem. This fact has received more attention than has thus far been given to any other in the whole range of the banking and currency discussion, and there has been more effort to apply some legislativo remedy to this than to any other condition.

In practice, when commercial credit had hopelessly broken down and the banks of the country found themselves seriously threatened by danger of failure, they have united for mutual protection, and clearing-house associations in the, chief cities of the country have joined in the issue of certificates good in liquidating obligations between banks. Sporadic and temporary as this remedy has been, it nevertheless has proven effective while in use, and after the panic of 1907 an attempt was made to provide for a permanent resort to this so-called clearing-house currency by passing the act of May 30, 1908, ordinarily known as the Aldrich-Vreeland law. This law will expire automatically on June 30, 1914, inasmuch as the act itself carries a provision limiting its own life to six years. The fact that this legislation will thus expire is regarded by many persons as an additional argument for action at the present time, inasmuch as the measure in question constitutes the only emergency protection against conditions of sudden difficulty in the money market that the country now has. The Aldrich-Vreeland law provides for the establishment of organizations of banks, to be known as National Currency Associations, which are to be allowed to take out notes under certain conditions.

It is worth observing that up to date the Aldrich-Vreeland associations have been an entire dead letter. The situation regarding them was clearly sketched by the Comptroller of the Currency in his last annual report, in which he said:

Under authority of the act of May 30, 1908, providing for the issue of "additional currency" secured otherwise than by United States bonds, 18 national currency associations have been formed, all of which, with the exception of the Los Angeles association, were formed prior to the current year. Each association has an aggregate capital and surplus of at least $5,000,000, and is composed of at least 10 national banks having an unimpaired capital and an unimpaired surplus of not less than 20 per cent of the capital, and having United States bonds on deposit to secure circulation to the extent of at least 10 per cent of its capital. There are 286 national banks forming these 18 national currency associations, their capital aggregating $321,105,710 and surplus $281.544.722. The capital represented is slightly in excess of 30 per cent of the paid-in capital stock of all national banks, as shown by the reports for September 4 last.

The title, membership, capital, and surplus of each of the associations are shown in the following table:

In accordance with the terms of the Aldrich-Vreeland Act, $500,000,000 in currency has been printed and is now ready, in blank, for issue in case of a call from any of the banks or currency associations authorized to issue notes by the terms of the law. Individual banks may issue such notes by depositing at the Treasury State or municipal bonds of approved kinds, receiving in exchange 90 per cent of the par value of such bonds, provided they are worth at least par. The currency associations may obtain notes equal to 75 per cent of the face value of commercial paper left with them by the constituent banks of the association.

One reason why the Aldrich-Vreeland law has never been availed of is that the issue of the currency was made very expensive, owing to the imposition of a heavy tax on such notes as might be taken out, while the banks were for a long time reluctant to go into the currency associations because of the onerous conditions under which they were at first required to be authorized by the terms of the regulations laid down by the Secretary of the Treasury. The law is thus not likely to be resorted to except in cases of very severe necessity for notes; but, even if such were not the case, it would remain a temporary expedient and a mere extension of its life would be only the renewal of such an expedient.

No statement could make clearer the inadequate character of the Aldrich-Vreeland Act or its purely temporary character. It is a weak makeshift, soon to expire.

RECOGNITION OF SITUATION.

That under the conditions just sketched there is a responsibility resting upon those in charge of the Government of the United States no one can deny. No more serious obligation to-day exists in the whole range of national problems. This duty has been amply recognized by the Democratic Party. In platform after platform it has stood firmly for the adoption of sound and courageous legislation, and at Baltimore in 1912 it adopted without dissent the following plank:

We oppose the so-called Aldrich bill for the establishment of a central bank; and we believe our country will be largely freed from panics, and consequent unemploy ment and business depression, by such a systematic revision of our banking laws as will render temporary relief in localities where such relief is needed, with protection from control or domination by what is known as the Money Trust.