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separate banks which are organized under the national currency act of 1863. But do they form a system in the sense in which we use that word to describe systems of which the executive, legislative, and judicial branches of the Government are examples? Lower and higher officials, elective bodies, and courts make up the gradations of these systems.

THE OPERATION OF BANKING.

It is evident that a national bank does not cover the whole operation of banking from the creation of debits and credits to their final extinction. The beginning of the operation is in a bank, and it is concluded in a clearing house. The enormous amount of clearings, aggregating fifty thousand millions annually, show the importance of their functions from a money standpoint. But their services can not be even thus limited, for they provide the daily test of the solvency of every bank and business man in the country; they provide a barometer of the state of credit and the movements of currency, and are the only places where individual banks are brought together and where united action can be secured.

Out of these conditions comes the necessity of mutual agreements and regulations for the government of the business to be transacted, and for the protection of the banks associated in the clearing house. The clearing house must have its articles of association or incorporation under the laws of the different States, its officers and committees, and their duties must be clearly defined. For the protection of the associated banks there must reside somewhere the right and duty to inspect the affairs of any of their number, and even to suspend one from its privileges on specified proofs and charges. These are powers in which not only the associated banks are interested, as the representatives of their many stockholders, but also all the customers of each bank, and the ramification of these interests in every clearing house as at present constituted stretch far and wide over the whole country. The organization and regulations of clearing houses become, therefore, matters in which the entire country is interested, and in times of commercial disturbance this becomes evident beyond question. At such times the most delicate questions are brought before clearing houses for their decision, and the wisdom of experienced bankers has then the opportunity to render important service in staying incipient panic and in carrying houses and banks over difficulties that are never known outside of banking circles.

THE PART OF CLEARING HOUSES IN BANKING.

The banking system, therefore, must be considered to include not only banks but clearing houses as well, and though these latter play such an important part in the banking operations of the country, they are not a part of the national banking system, and are not under govermental supervision. The question arises, Can the national system be considered complete until clearing houses are incorporated in it under United States laws and Government supervision? To answer this question intelligently we must then take a glance at our national banking system and inquire what are its chief distinguishing characteristics, not only at home but as compared with the systems of other nations.

It is a remarkable political fact, and one which we do not always fully appreciate or give sufficient weight to, that the United States stand alone among the nations of the earth in having a national system of

banking based upon a general law. This situation has been reached as the outgrowth of American institutions, and as the result of political and financial discussions and campaigns conducted with intense excitement on the one hand and acknowledged ability on the other. Now, it must be received as the first article of our financial creed, universally accepted as republican dogma, that banking in this country must be done under a general law.

PURPOSE AND EFFECT OF A GENERAL BANKING LAW.

The underlying purpose of a general banking law is to form banks for the benefit of the people, and to make free all the benefits of the law to any who comply with its conditions.

The chief effect of a general law is to create a large number of individual banks of moderate capital in all parts of the country. Banks of great capital, sufficient to give a world-wide credit, or to enable a bank to establish branches in this and other countries, and to issue currency on its own credit, are not contemplated by a general law. Such banks must have special charters and be to some extent monopolies, and they are conducted for the privileged owners and not for the people.

In a banking system composed of 4,000 individual banks of equal standing and moderate capital there must be found some substitute for the great banks of other countries-the Bank of England or the Bank of France. That these banks, from their central position and commanding capital, do give a steadiness to the financial affairs of their countries, and that it would be a benefit for our finances to be steadied in the same way, can not be denied. Our people will, however, neither yield their approval of general laws nor their disapproval of a governmental bank. This great need of a balance wheel in our financial system can be met in entire harmony with republican institutions by another general law which will provide for the incorporation of associated and adjacent banks in clearing-house associations, as provided in the bill before us. By means of the provisions which can be incorporated in a general law the defect may be obviated of the lack of commanding capital, and all the advantages secured which large resources bring, not only for the transaction of current business but for special emergencies, when united action would be desired to preserve the stability of the financial situation.

The advantages resulting from the joint action of banks may be seen in the union of the banks of Great Britain in the crisis of 1890, when by concerted action they formed a guarantee fund of £15,000,000 to save the Barings from suspension. By this magnificent energy a panic was avoided which the Bank of England was utterly unable to meet alone. Among Macleod's reflections on this subject is the following:

To meet such tremendous crises, as all future ones will be, the Bank of England must act together with all the other banks in the country to support the commercial community.

CLEARING-HOUSE CERTIFICATES OF 1893.

The united action of the banks composing the clearing house of New York in 1857, 1860, and 1861, and at various times since then, by the issue of clearing-house certificates, of which the last familiar instance was in 1893, proved of the greatest benefit not only to New York but to all the country. This action was without any special legal authority, and it is evident that if our clearing houses are incorporated under a

general law, and made part of our banking system, that we would have the machinery ready for action all over the country to meet any financial crisis, and that not a day's delay need occur before it is announced that adequate provisions have already been made for any emergency. The united action of the associated banks of the United States through their clearing houses would always establish credit, and this resource would always be at hand if the clearing houses were incorporated into our banking system by act of Congress. It is to Congress the country must look for appropriate legislation to include all banking operations under Government supervision, so that in fact, as well as in name, we shall have a national banking system.

Republican ideas have thus far controlled the development of our banking system. Under the guidance of the principles contained in the Declaration of Independence the monetary system of the United States has reached a point which is in certain particulars in advance of that of any other nation in the world. In the characteristics of general banking laws, and governmental inspection and uniform and complete statistical reports, no other country has reached our degree of theoretical advance. We need but to add the capstone of association under a general law with governmental supervision to make our system not only the best in the world but the most efficient instrument possible for the development of the resources of our land. And this last step is preeminently republican, for it leaves the individual banks free and independent and yet organizes them into strong bodies by means of incorporated clearing houses. A banking system so formed would last as long as the principles of representative government.

Having thus considered the incorporation of clearing houses under a national law as necessary to complete the national banking system, we will now discuss such incorporation as a measure "to protect and support commercial credit, and equalize rates of interest."

SAFEGUARD AGAINST PANICS.

A bill which has this for its first stated object not only proposes to do that which the entire business community must approve of, but it implies that commercial credit is now unprotected and unsupported, and that there is need of some additional agencies other than those at present in existence, to fully and perfectly accomplish this most devoutly to be desired result. The argument on which this bill is based is so simple that it can be stated in a single sentence, but the subject is so large that volumes could be written in elucidation of it. In a sentence, it is this: Panics or failures of commercial credit come upon the business community with unwelcome frequency, and an ample safeguard against their destructive effect would be provided by incorporating clearing houses under United States laws, with power to issue currency on pledge of convertible collateral security to banks applying for such accommodation. It is evident also that any system which is able to bear a great strain can with greater ease bear a lesser, and if the system of incorporating clearing houses could avert panics, it could also avert money pressures of less magnitude and meet the requirements of busy seasons as well, and thus attain the great desideratum of equalizing rates of interest throughout the year, and from one end of the country to the other, so that business men should not be compelled to pay high rates of interest for money only because business is brisk, or those in one part of the country be compelled to pay a higher rate of interest than those living in another.

We must here interject a few general remarks. Bankers, as such, have only an indirect concern in the purchase and minting of silver by the Government, for they can bank as well on one basis as another, but they justly ask of the Government a banking system as nearly perfect as possible. We must also separate the finances of the Government from the operations of commercial banks organized under State and national laws. The Government does not issue its currency in accordance with the national banking act, but on an entirely different principle. All the troubles of the Government of the United States with its currency could be remedied in one season by the enactment of a tariff which would produce a revenue greater than the expenses. Let us now return from this short digression.

As the lesser is contained in the greater, we must consider, for a proper understanding of the objects of this bill, the nature of the failures of commercial credit, called panics, and the two methods of their

cure.

NATURE OF PANICS.

Panics are occasional failures of confidence which are inseparable from an unprotected credit system. The credit system may be said to have begun in England by the chartering of the Bank of England in 1694. Two years later Bank of England notes were at 20 per cent discount, and the bank stopped payment thereon in coin (Adam Smith, Book II, Chap. II). So it appears that two years after the modern credit system was established there was a failure of confidence, and we have been having a repetition of the same experience every few years from that time to the present day.

The cause is not far to seek. We give credit to an order or promise to pay of a government, individual, corporation, or bank. A bank will print a circulating note to read: "We promise to pay on demand one dollar," or will receive deposits and promise to pay them on demand, and if we believe the bank can and will do as it promises we give it credit. But we know all the time that the bank only keeps on hand in cash 25 per cent of its promises to pay. Everybody knows that, but in an intelligent community-and credit is only possible in such-the giving of this credit is accepted and recognized as reasonable and right, and the sufficiency of a reserve of 25 per cent is believed to be as good for all practical purposes as keeping in hand the entire amount.

DANIEL WEBSTER ON CREDIT.

But not only banks and governments promise to pay money which they have not in hand, but all business is conducted on the principle of a reserve, which are other words for the credit system. The merchant, manufacturer, and business man generally all promise to pay in the future the money proceeds of commodities which are yet unmanufactured and unsold, and enough cash only is kept on hand to meet present requirements. By means of the credit system the amount of business is enormously increased. "Credit," said Daniel Webster, "has done more a thousand times to enrich nations that all the mines of all the world."

But let something unusual happen- a war or other disaster-then the insufficiency of the reserve is brought to men's minds with startling vividness. The credit vanishes and fulfillment of the obligation is demanded.

CUR- -7

SILVER SCARE AND VENEZUELA MESSAGE CAUSED PANIC.

A withdrawal of 10 per cent of deposits is sufficient to throw the whole banking system of the country into confusion. In 1884 the failure of the Metropolitan Bank and other circumstances caused such a withdrawal and the consequent panic. In 1893 the silver scare and in 1895 the Venezuela message have done the same thing. These troubles are not due only to the bank failure, the silver question, and the Venezuela message, but to inherent defects in our system. Therefore the true mode of procedure is to cure the system, so that it can in the future meet similar emergencies and not be overwhelmed by them.

With only 25 per cent it is, of course, impossible to pay 100 per cent, and when a panic occurs a struggle to realize on investments takes place, prices fall, payment of debts is demanded, failures are precipitated, ending in liquidation, which is commercial death and decomposition. This is a panic, and every such occurrence causes distress to families and sets whole communities back by destroying productive business and obliterating accumulated capital. The loss to this country by the panic of 1837 was then estimated at six thousand million dollars. This was the greatest monetary panic which the world has ever seen.

Every panic brings its losses and restrictions to business by the disarrangement it causes.

METHODS OF DEALING WITH PANICS.

There are two methods of dealing with panics, one called the restrictive and the other the expansive.

There are some who say there is no need of any regulation of this subject. They say that the debtor class should take care of themselves; that the general public must be educated to recognize that the market for gold or other forms of money is regulated by the same laws as that of any other commodity, and that the mysterious "money question" consists of nothing but the simple circumstance that a man who has promised to deliver a certain amount of money at a specific date is bound to fulfill his contract in the same way as if he had promised to deliver wheat, cotton, or iron.

This argument would be correct if there were no credit system which has been firmly established by two hundred years of business and incorporated into the laws of the country. If commercial transactions were effected by barter, the above view, which is from Mr. Sampson, money writer of the Londen Times in 1873, would be correct. But by law banks are conducted on the credit system, and the law allows them to contract to pay money with only 25 per cent of their obligation in cash on hand. If it is legal for banks to conduct their affairs on the credit system, and if failures of that system happen periodically, then the law should make provision to meet those failures, so that the credit system may work smoothly, both in times of peace and quiet, and in times of disaster and commotion.

FORCING LIQUIDATIONS.

The restrictive method is by forcing liquidations. An enforced liquidation is the closing of a financial transaction not in its natural order; that is, when a favorable market is reached and all parties realize the expected profit, but by an arbitrary demand of a creditor who is not interested in the profit, and who merely wants his money to provide for

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