within and without Washington, that what they were seeking was a financial system that would give us an average rate approaching that of the Bank of France where interest over a series of years averages between 3% and 4%. They frankly said they hoped for something under a 4% rate. The charge was that the centralization of reserves in New York or Wall Street made money for the bankers and gamblers in that "den of iniquity," taxed the country with irregular and high rates of interest and repressed commerce, investment and prosperity. Therefore, the proposal in outline was that New York should be financially carved up; that the reserves of national banks now centralized in New York should be taken away and between three and four hundred millions of the bank reserves which are now redeposited in that center by the 7500 national banks over the country should be removed to other centers of commerce and industry; and thereupon should be built an elastic banking and currency system, each center serving its own local community, but all interknit, each with the other for mutual support. Today 7143 national banks, generally classified as country banks, are required to keep 15% of their deposits in reserves, of which 9% may be kept in reserve city banks. These reserve city banks are divided so that three cities, New York, Chicago and St. Louis, are known as "central reserve cities" and the 52 banks therein must keep 25% of deposit liabilities in their own vaults. Outside of these there are 47 "reserve" cities whose 314 national banks must carry 25% of their deposits in reserves, one-half of which may be held in the banks of the three central reserve cities. This makes a concentration of bank reserves in New York city, which Congress desired to decentralize. Wall Street was not responsible for this centralization. The banks of the country and the national bank act were responsible. The New York banks never originated the system, but, of course, made money out of it. It has been figured that they made one-third of 1% per annum upon these deposits, but this was not their great profit. The profit came to the financial powers in New York who knew the ebb and flow of currency, spring and fall, and changed their investments as betwixt money, bonds or stock, according to the money currents. New York, as a recipient holder of fluctuating bank reserves, was the seat of financial power, and had control of rates and the distribution of credit according as money flowed in or out. When money flowed in after the country's planting or harvesting, New York bankers said who should have it and upon what merchandise, what stocks and bonds, it should be loaned. Now this is to be changed and Wall Street, and Wall Street bankers, see the rightfulness of the change and welcome it. They will no longer be burdened with this ebb and flow of money and the Stock Exchange and Wall Street will be on a more stable and normal investment and speculative basis. Money will not be unloanable at 2% at one season of the year and vanishing at 12% at another season of the year, with forced fluctuations in stocks and bonds according to the monetary necessities. The money fluctuations are primarily due not to the action of Wall Street or Wall Street banks, for these are only reservoirs, but to the country banks which call their money home and return it at their own pleasure or according to their local crop demands. To accomplish the re-distribution of reserves it was proposed to have 12 regional reserve banks throughout the country, the Treasury money and a large part of the bank reserve moneys of the country to be removed thereto and there made the basis for commercial re-discount and an elastic currency to be issued by the government through these banks to the national, or member banks, who must be the stockholders in the regional reserve banks, paying in the $100,000,000 capital in gold. New York and other sections declared for a central bank, or a reduction in the number of reserve banks, as conducive to strength and security. The final compromise was, as in most other features of this bill, left to the new Federal Reserve Board, with headquarters at Washington, to determine the federal reserve districts and place therein not less than eight nor more than 12 federal reserve banks. As New York City represents about one-quarter of the financial. and banking power of the country, including foreign bankers, private bankers, state banks, and national banks, and as New York, with the two or three adjoining states naturally tributary thereto in a financial sense, should constitute about 40% of the banking capital in the regional reserve banks, this city should still be the financial center, for its regional reserve bank cannot be otherwise than the real central bank. Boston, Chicago and St. Louis should have some strength within their own territory, but outside of these four cities the regional reserve banks will ultimately find their larger function or usefulness in the clearance and collection of checks, although of course in the aggregate they will do a considerable re-discount business. As reserve banks, however, they are too divided to be of any moment or consideration in a crisis. The crisis, if crisis there ever he, will come about in the effort to attain that for which Congress has endeavored to legislate-cheap money. > The function of a reserve bank is to hold reserves for future emergency. To hold reserves, the discount rate thereat must be higher than the outside or open market rate. Then when the open market rate advances and the demand closes in on the central reserve, the bank is in control of the situation and in position to supply the demand at rising rates of interest. On the other hand, if it enters the discount market and competes with other banks and bankers in the loaning of its reserves at low rates, or even normal rates, it makes money easy and borrowing easy and buying easy. Prices rise, making that the best market in the world to sell in and the dearest to buy in, with the result that merchandise flows in while exports fall off, and congestion, both of merchandise and of securities, results. When the inevitable end is reached the relied-upon reserve power has either disappeared or is found wholly inadequate to cope with the situation. The entire safety of the situation under this bank act is in maintaining "reserve rates" of discount, refusing the popular clamor for easier money or lower rates, and, if discounts must be made, the accumulation of discount reserves in foreign markets where they can be commanded without home disturbance. If the new Federal Reserve Board is of the desired quality and character it will be the most unpopular board that ever sat in Washington. It will turn deaf ears to all political and sectional considerations. The greater the clamor for cheap money the tighter it will hold the reserves within or without the country. It will keep watchful eye upon every section to see that banking facilities for cornering potatoes in Maine, or cotton in Texas; lumber in Oregon or the Carolinas; corn in Illinois, or wheat in Kansas or Minnesota, are absolutely not furnished by any part of the reserve system over which this board presides. It will be watchful over extravagant imports that may call money from the country and will know the causes for rising and falling prices, so far as they relate to money; and, if within its financial domain, it will lend a hand in checking any extremes or over-extension of credit to any section, or any industry. It will at first frown and then caution; later it will command even to the re moval of every director and officer of any federal reserve bank, and their removal under the powers of this Board is absolute and without appeal. No such power in the world was ever before contemplated as is now concentrated in the as yet unannounced Federal Reserve Board. It is not only the "reserve" banking system in itself, but when rates advance it becomes the most autocratic centralized banking power that was ever dreamed of in history, irrespective of whether the system embraces only the national banks or includes also the state banks and trust companies. Just two months before this act was signed by the President, or on Oct. 23, Senator Owen, addressing more than one thousand persons at the Boston City Club, where his statements would certainly be conservative, rather than radical, said: "I am sure that the great bankers of the country will regard with a sigh of relief a condition which will make future panic impossible, and which will give us a stability of interest rates comparable with that of France. I remind you that the interest rate of the Bank of France has been three-fourths of the time right about 3%, and has not gone over 4% for nearly 90% of the time in the last 50 years. These great federal reserve banks can afford to set the standard of lending money to the member banks at 3% and 4%." The attempt to compete with the Bank of France in low interest rates will with rising prices invite the return of our investments held abroad, for we will be the dearest market in which to buy and the best market in which to sell. We will invite the return to us of 10 billions of American securities held in Europe. France can have a low interest rate for she is a great accumulator of wealth and has no enterprises within her borders to consume her surplus capital. Her wealth must always flow out. It concerns nobody except herself whether her rate is 2% or 4%. England is the creditor of all nations. She has a currency in her bankers' pocketbooks that gives her a greater per capita circulation at home and abroad than any other country in the world. She has $2,500,000,000 of bankers' bills due daily or within a few months, which all read "sterling" or gold. With these she holds the financial keys of empires. The world is her debtor. London's supreme confidence in her own creditor position is well illustrated in the declaration that the Bank of England has only to raise the discount rate and it can draw gold from the moon. The United States might raise her discount rate and invite gold, but, unlike England, she could not command it. England's securities are all within her own strong boxes and are the titles to rivers of interest flowing in upon her ledger balances every month. But the United States, rich and powerful as she is above all the nations of the earth, is yet loyal slave to creditor owners, and from Italian immigrant to the strongest railroad corporation, she is working every day to pass gold over to the mother countries. |