Fifty years in Wall Street
which should have been conceded to the higher training and more select
ability that administer the metropolitan banks, has been ignored, and
heavier restrictions have been placed upon the New York national banks
than upon those of any other part of the national system.
The “reserve” laws are oppressive to no better purpose than that of
positive injury. All other banks than those of New York are permitted to
count in their reserves any funds resting with their “redemption
agents;” and this item usually constitutes, in the case of banks of the
“other reserve cities,” 41 per cent. of the total reserves held, and in
the case of all other banks about 60 per cent. The New York banks, on
the contrary are compelled to hold their _entire_ reserve (25 per cent.
of their deposits) in the form of lawful money. Nor is this the heaviest
embargo. The reserves are not permitted to be used when the occasion
arises for which a bank reserve is always presumed to be provided. The
moment a bank allows its reserve to fall below the required 25 per cent.
it becomes the duty of the Comptroller of the Currency to close its
doors and put it into liquidation if the deficiency be not immediately
made good. If panic occurs, and depositors want their money, there is
nowhere any power to relax the crushing force of this law, and the banks
are therefore compelled to suspend payment to depositors and in order to
avert general ruin at such times they have to resort to the expedient of
making their cash assets available in common, thereby saving themselves
and their customers outside of and in spite of the destructive tendency
of the law. Of course, the danger of running into such a crisis as this
creates a feverish dread in all times of special stringency in the money
market. All eyes are at such times fixed upon the reserve “dead line;”
and, as that limit is approached, loans are artificially contracted,
depositors draw their money, and the very reserve that should be used
for elasticity and to relieve periods of special tension become the
certain cause of panic and ruin. A banking centre whose banks are
periodically exposed to dangers of this serious character, and where the
law unites with adverse circumstances to foster panics, is hampered with
the worst possible disqualification for performing those higher and
broader functions of banking which demand freedom of discretion and
elasticity of resource.
This evil appears all the greater when it is considered that the amount
required to be set apart as so much idle reserve ordinarily exceeds the
entire capital of the banks. It might be supposed to be serious enough
that such a large proportion of the resources of the bank should be held
perpetually idle and earning no interest; but when this sacrifice of
earning capacity is made for a purpose that brings no advantages, but
rather a very serious danger, the effect can be nothing less than an
unwholesome and very injurious restriction upon banking operations, and
it is not surprising, therefore, that the national banks of New York
city exhibit decadence instead of progress.
What is needed to enable this metropolis to reach the financial status
to which it is entitled is a class of banking institutions possessing
facilities and functions much broader and freer than those conferred by
the national charters. It is out of the question to hope that these
facilities may be provided through modifications of the national bank
system. The banks, and especially those of New York, have to encounter
so much prejudice and ignorant demagogism from Congress, in seeking any
modification of the national system, that they would sooner endure
almost any wrong than demand changes in the law. Their only redress is
in reorganizing under the State laws, which many of them have already
done, whilst new institutions almost uniformly prefer the State system.
To meet the wants here contemplated, it would probably be necessary to
get from the State Legislature special authorization for forms and
functions of banking not now distinctly provided for under either
Federal or State laws.
The special business to be done by such a class of banks scarcely needs
enumeration, much of it being so self-evident. In the present stage of
our national development, it is becoming a grave reflection upon our men
of capital that we should remain almost entirely dependent on foreign
bankers for the facilities for transacting our immense external
commerce. The necessity that formerly existed for this dependence can no
longer be urged as an excuse. All the capital and the banking experience
necessary to found and to administer large credit and exchange
institutions are ready to hand. A business of $1,200,000,000 per annum
connected with our imports and exports would be available for this form
of enterprise. Our export trade is crippled in many branches of business
simply because it is found impossible to get the liberal credits
necessary to facilitate consignments to distant markets. Manchester
defeats us on cotton goods, not so much on the ground of prices or
superiority of fabrics, but because her merchants can get any time or
amount of credit required, whilst we have to market our goods on
restricted credits and through Manchester agents, who at the same time
are selling English products in competition with ours. The English
exporter has the advantage of being able to get his credits from the
bank with which he keeps his account, while the American has to go to a
foreign banker, who has no inducement to consider his convenience or to
moderate his charges. The natural place for an export merchant to keep
his account is with the bank that grants him his credits; and this fact
suggests the facility with which banks of the kind here suggested could
build up a large business.
Every year we find it necessary to largely pledge our cotton crop in
advance to provide the means for gathering and marketing it. Why should
this money have to be drawn from England, especially as the crop is
thereby subjected to the control of the foreign buyers, and we are
unable to protect our own products? These advances afford an
illustration of another class of important operations in which the
existing banks cannot directly participate, but which ought properly to
be undertaken by domestic banks.
With respect to our importations, what sufficient reason can be urged
why the importer should have to get his credit from the agent of a
London banker, instead of receiving it from an American bank through
which he chose to transact his entire business, and which, therefore,
would be the fittest source for procuring his credits? It cannot be to
the advantage of the importer to be exposed to the vicissitudes of the
European money markets, nor can the London banker grant credits to
merchants 3,000 miles distant, whose position he imperfectly knows,
without compensation for the extra risk. The business is, therefore,
done at a disadvantage to both parties. The credit should be issued
directly from the point where the importer does his business; and this
would soon become the fact were banks to be provided possessing special
adaptations for doing such a business.
Other functions proper to institutions of the character here suggested
would be the negotiation of corporate loans, temporary advances to
corporations, the receiving of corporate accounts, and the facilitation
of corporate reconstruction. Banking for the larger corporations
presents many possibilities of advantage to both banks and companies of
which our existing banks cannot, as at present restricted, avail
themselves.
It is needless to say that these suggested institutions, whilst
undertaking operations of the special character above indicated, should
also aim to secure the best class of deposits and to discount the higher
class of paper. As the national bank laws would prohibit to them the
profits of circulation, it might well merit consideration whether they
should not issue to customers of high standing their own acceptances,
within certain safe limits. These credits, yielding the current rate of
interest, would be a highly profitable, as well as an entirely
legitimate branch of business; and they have the sanction of successful
usage among the best banks of London. I am unable to see what objection
there should be to further following London precedent by allowing on
deposits a rate of interest below that current in the market for the
time being. Such a course would attract accounts and would immensely
increase the power and the earning resources of the banks. Moreover, as
such institutions, being exempt from embarrassing reserve restrictions
and other needless limitations, would be less subject to the
oscillations of the money markets than are the present banks, they would
afford better advantages to members of the Stock Exchange in the form of
loans upon securities than they now are able to get. The importance of
this business may be inferred from the fact that the yearly transactions
in stocks at the Exchange have averaged, for the last six years,
102,000,000 shares, which, at an estimated average of $60 per share,
represents an annual business of $6,120,000,000, to say nothing of the
business in bonds, which also is very large.
Banks of this character would naturally attract a large portion of the
Stock Exchange houses, which experience has shown to be exceptionally
safe and profitable. The single fact that these banks would not be
obligated to conform their loans to arbitrary 25 per cent. reserve would
be a decisive reason for Wall Street firms doing their business with
such institutions.
To some extent the wants here alluded to have been met by our loan and
trust companies. As institutions of loan and deposit these institutions
are doing important public service, and the deficiencies in the
functions allowed to the national banks are diverting to them a large
and valuable business. The companies of this character in New York and
Brooklyn have nearly $14,000,000 of capital and $15,000,000 of surplus
and profits. Their resources aggregate $175,000,000, and their deposits
$137,000,000. Their rapid progress is indicated by the fact that, since
1883, their resources have increased $32,000,000, or at the rate of 27
per cent. during three years of depression in business. But while this
success demonstrates the great necessity for enlarged local banking
facilities, the facilities afforded by the trust companies are entirely
too limited to satisfy the large special requirements of a great
financial centre above referred to, and only add to the necessity for a
class of banks which shall do for New York what the great joint stock
banks and the mammoth private discount houses of London are doing for
the business of that cosmopolitan centre.
These suggestions are offered for what the men of Wall Street may deem
them worth. They demonstrate that there is ample scope and urgent need
for a new element in our banking arrangements to accommodate the larger
operations of finance and commerce; and it would not be difficult to
prove that the country is suffering seriously from lack of such
facilities. It will not be pretended that there is any lack of either
the capital or the managerial talent requisite for such enterprise. Nor,
since the rate of interest has come to rule as low in this country as it
is in Europe, have we any longer anything to fear on that ground from
the competition of foreign bankers. At any rate, if New York aspires to
a position of financial independence and to become, in the broadest
possible sense, the financial centre of the vast and growing exchanges
of this continent and of its transactions with other nations, there
should be no delay in giving this greater breadth and scope to its