Fifty years in Wall Street
generally, for its influence is far-reaching. The drain of money from
the outlying districts, including New York, to move the crops, is
reduced as banking facilities in the West and South increase.
In the South, during the same period, there has also been very great
commercial and banking development, with the banks and trade going hand
in hand to help each other, as in the Southwest. The South was never
before so active and prosperous; and, rapidly as it is progressing, it
will go on prospering with unabated vigor and enterprise, for it has
entered upon a new era of prosperity and immense development of its
material resources awaits it. In manufacturing and mining, as well as
agriculture, immense opportunities are open to it; and before long the
natural increase of its population will be largely added to by the white
immigration that it needs. So the South has a bright and magnificent
future.
This vast industrial and mercantile activity—this general business
enterprise, this land and mining speculation, or boom, has extended, in
various degrees, all over the United States, and the influence it has
had on the money market in large cities, and particularly in New York,
was only a natural and easily foreseen result. It has produced a
corresponding activity in money, because of the greater demand for its
use; and the real estate speculation, the vastest we have to deal with,
is still increasing.
The boom is almost entirely in land and mostly in vacant plots, or lots,
suitable for building purposes; but there is also a very active
speculation in improved property, and much speculative building. The
amount of money practically locked up in this land speculation is much
larger than is generally supposed.
Statistics of 29 of the largest cities of the United States show that in
the month of May they issued permits for the construction of 13,712 new
buildings, to cost $55,074,761, against only 12,036 in May, 1905, to
cost $50,791,738, an increase of 8 per cent, and a similar increase was
shown in each preceding month of 1906. The May increase was greatest in
cities remote from the Atlantic Coast; in Portland, Oregon, it was 309
per cent; in Tacoma, 111 per cent; in Seattle, 30 per cent. But the San
Francisco catastrophe was evidently the main cause of the large increase
in Portland and Tacoma. Yet the increase in Omaha was 75 per cent, in
St. Paul 49 per cent, in Duluth 110 per cent, in Louisville 50 per cent,
in New Orleans 47 per cent, and in Chicago 39 per cent. These figures,
dry as they may seem, are eloquent in their suggestiveness of the extent
of the demand for money from this one source, the land and building
boom.
Gold and silver mining speculation, too, last year began to assume the
dimensions of a boom in Nevada, and all the old metal and mineral mining
camps, and many new ones in other States, are, like the Lake Michigan
copper regions, scenes of active speculation in properties, as well as
busy with mining, and hosts of speculators are their own bankers,
carrying large amounts of currency in their pockets.
The money that usually returns to the money centers is thus widely
scattered and too busily employed to return. So we have to deal with a
period of prosperity and industrial activity that is something more than
normal. But—without referring to the heavy drain of cash for the relief
of San Francisco, which was offset by gold imports—although money was
scarce in New York, owing to this enormous activity and general
prosperity that kept it moving from hand to hand, it was not scarce
enough to justify the excessively high rates we often witness on the
Stock Exchange. These were serious and hurtful, and to guard against
such vicissitudes in our money market every member of the Stock Exchange
and every banker and bank officer should use his influence.
How far the Chamber of Commerce Committee on the Reform of the Currency
will succeed in providing remedies for the monetary situation remains to
be seen. But from the twenty-seven questions it has sent to bankers and
others it is apparent that it contemplates no fundamental change in our
currency system. Inferentially, it will not interfere with United States
legal tender notes, nor with United States bonds as a basis for the
circulation of the national banks. Yet both bases are indefensible on
sound economic principles. The issue of greenbacks was merely a war
measure, and intended to serve only a temporary purpose; instead of
which we have made it permanent, so keeping the Government in the
banking business with its war currency system.
There can be no question as to the false bottom on which the national
bank currency rests; for paper, that is, paper money, should not be
secured by, or redeemed in paper, even when that paper is as
indisputably good as United States bonds. All our paper money ought to
be based on readily convertible assets and redeemable in gold. Bonds,
even United States bonds, by which national bank notes are now secured,
are only evidences of debt, and the time will come when these will be
liquidated, and the sooner the better.
The committee probably thinks that the existing order of things,
notwithstanding its fundamental errors, is too deeply rooted and
strongly fortified to be materially changed without danger of the remedy
proving worse than the disease. It consequently favors more national
bank currency on the present basis. Branch banks and rediscounting for
small banks by large banks are also favored. The committee’s questions
indicate, however, that it favors the abolition of the Sub-Treasury
system, and to that result it should resolutely bend its energies. At
present the Sub-Treasuries are practically banks, like the old United
States Bank at Philadelphia, with the important difference against them
that all the money they take in remains locked up in their vaults till
paid out on Treasury drafts. The evil effect on the money market, and
particularly on Wall Street, of thus withholding money from circulation
in periods of stringency has been too often felt. It was more than
usually conspicuous and severe during the late tight money ordeal, owing
to the Treasury receipts very largely exceeding its disbursements. This
greatly aggravated the scarcity of money in New York, due to other
causes, and resulted, in Wall Street, in the rates for call loans
ranging at times, within the last six months, with rapid and eccentric
fluctuations, from 15 to 30 per cent, and on one occasion touching 125
per cent. We have here a phenomenon entirely distinct from ordinary
monetary conditions.
These extremely high and highly fluctuating rates are, it is true,
peculiar to the New York Stock Exchange, but they are none the less a
great evil, and they acquire national and even international importance
from the fact that New York is the financial center of the country and
the New York Stock Exchange the barometer of financial values for the
whole United States.
However much our commanding position may in other respects fit New York
to be the world’s financial center, it cannot aspire to and secure that
position of power so long as it is the scene of these violent
fluctuations in the rates of interest for call loans on the Stock
Exchange. Measures should therefore be taken not only to prevent them,
but to make their recurrence impossible; and how this can be best and
most efficiently accomplished is a matter for very serious
consideration.
That it can be accomplished is evident from the entire absence of any
such violent rate oscillations in the money markets of Europe. There the
rates of interest fluctuate slowly within a reasonably narrow range,
generally between 3 and 5 per cent, the extremes being 1 or 2 above, or
below, these figures. Such unreasonable eruptions in the money market as
we have sometimes seen in the loan crowd of the New York Stock Exchange
were never seen, and would be impossible, in London, Paris, Berlin, or
any other European capital. Why, then, should they ever occur, or be
possible here?
In response to questions propounded by the Chamber of Commerce Committee
I would say that, as the Sub-Treasury system is a disturbing factor in
the money market, provision should be made by Congress for the regular
deposit in national banks of surplus Government money above its regular
working balance of fifty millions, the banks to pay interest at 2 per
cent per annum thereon.
Bank notes, in my opinion, are a form of bank obligation the same in
principle as bank deposits, payable on demand, and these notes, as the
most convenient form of credit, should be released as much as possible
from restrictions not necessary to secure their safety, acceptability,
and redemption in gold, or United States legal tender notes, for so long
as the latter may be kept outstanding.
In seeking increased flexibility for our currency I would not suggest
anything that would impair the value of United States bonds as a basis
of circulation; but it deserves consideration whether new currency might
not be issued by moderately increasing, above the par of the bonds but
not above their average market value, the amount of notes to be secured
by them. Then, too, why should not national banks be authorized to issue
a fixed proportion of circulating notes upon their general resources,
these to be secured by a guaranty fund? To induce the retirement of
these notes when not needed, owing to money being superabundant at low
rates, this asset circulation could be made liable to a graduated tax.
The proportion of notes to capital that should be allowed, and the
amount of the tax, are matters upon which bankers differ, but I favor
strict moderation in both. This asset currency, under moderate
restrictions, for use under ordinary conditions, would be far preferable
to any emergency circulation, ISSUED UNDER A HIGH TAX, although
Secretary Shaw recommended it in his report for 1905.
As the taxes collected upon the circulation of national banks from 1864
to the end of June, 1905, amounted to $96,220,997, and the failed banks,
during that period, had outstanding only $17,295,748 of notes, and the
dividends paid on their claims averaged 77.95 per cent, it follows, at
the same ratable proportion of loss, that the deficiency on account of
their notes would have been only $3,813,712, or 22.05 per cent of their
total circulation. So in the light of this experience I see no great
risk in a guaranty fund, consisting of the taxes paid upon circulation,
nor do I see why it would not be sufficient to redeem all the notes of
failed banks.
I would make the asset currency a first lien upon the assets of the
issuing banks, and allow the banks to redeem their notes at appointed
redemption places in the large cities. This would save the trouble and
delay of sending them to Washington, and by facilitating redemptions
when money was easy, give more ebb and flow to the currency and tend to
prevent excessive speculation in times when there is a glut of money.
Under the Canadian banking system there are several central redemption
cities for bank notes; but I would not, as is the case in Canada, limit
the right to issue notes to banks of not less capital than $500,000.
There is safety in numbers, in regard to banks as well as other matters.
Then, too, it would be well to make all the Sub-Treasuries in the
country useful as national bank note redemption points, because it would
contribute to the elasticity of the currency in the same way that it
does in Canada, and doubtless Congress would favor such a measure.
The proposition to establish a new bank in Wall Street with $50,000,000,
or even more, capital, or to increase the capital of an existing bank to
that extent, to serve the purposes of Stock Exchange borrowers, and