Fifty years in Wall Street
country, and to acquire all such advantages for the Government and the
people, in my opinion, is to wipe out the whole system of National Bank
Currency, and give such banks, or any banks, Government currency direct,
upon the same securities and such other kinds of securities as the
Government is willing to accept, and permit the banks to increase or
diminish the amount it obtains whenever the business of the banks
requires it; every bank to do no more than give sufficient security for
the money. The Government need do no more than to take the security and
hand the bank the money. The Government should be paid for the use of
the money a low rate of interest, say one per cent. No bank should be
required to pay more.
The credit of the Government will be all sufficient for the credit of
the currency, and every dollar of it would be perfectly secured by the
security given the Government for it by the banks. The issuing of the
money by the Government under this system would not injure the credit of
the Government in the slightest degree. Banks should be allowed to
increase or diminish the amount of money they obtain in amounts which
can be decided by the law. Such a system would be satisfactory to all
the people, except the national banks. These banks have been given the
privilege of having their names on the money they issue long enough. The
money of the banks has ever been Government money. The Government has
promised to pay it if the banks did not, and has had the means of
paying. Let the Government do as it should: issue all the money. Let it
be circulated by banks which give proper security for it. Enlarge the
means of securing the Government, by accepting State and Municipal
bonds, or even Railroad bonds, to the extent of say 50 per cent, and
Government bonds for the other 50 per cent.
The amount of additional business this change in the finances of the
country would make the Government, would be no greater than any other
change would make, and would be much less than what will be necessary if
the present bill before the Senate is passed. All the great work and
expense of settling up the affairs of broken national banks and paying
off their notes will be stopped.
There would be no such things then for the Government to settle. The
Treasury can be required by the law to keep all the currency issued for
the purpose, that may be taken up, distinct and separate from all
Treasury receipts from other sources.
The severity of the panic ordeal of 1907 that the New York banks passed
through was reflected in the issue to them by the New York Clearing
House, on and after October 22d, of, in all, a hundred millions of loan
certificates, although the largest amount of these outstanding at any
one time was eighty-four millions. This form of banking relief is purely
American and has never been adopted in Europe. The maximum issue of
Clearing House loan certificates in the panic of 1893 was $41,690,000,
and in the panic of 1873 $26,565,000. But in 1893 New York bank deposits
were only $400,000,000; in 1907 they were $1,050,000,000, exclusive of
Trust Companies. The maximum of certificates in 1907 was reached in the
third week of November, but the Clearing House banks showed their
largest deficit in reserve—$54,100,000—in the first week in November.
Simultaneously the loan certificates issued by the Boston Clearing House
reached their largest aggregate, $11,995,000. It is noteworthy also that
three powerful New York banks then held one-third of all the loan
certificates issued by the New York Clearing House. One of these held
$13,500,000; another $10,000,000; and the third $7,500,000. The obvious
object of this was to enable the strong banks to loan a part of their
cash reserves to weak associates.
The Clearing House Committee and the New York banks individually and
collectively did splendid work in mitigating as far as possible the
effects of the panic, while the Secretary of the Treasury, Mr.
Cortelyou, rendered very valuable service by co-operating with the
national banks to reduce the monetary stringency through large Treasury
deposits and facilitating the importation of gold.
Mr. Morgan and several other private bankers also rendered praiseworthy
service during the panic, and my firm did its part by loaning to the
members of the Stock Exchange, at the most critical period, three
million dollars at moderate rates of interest.
The New York Clearing House is a non-incorporated association, but its
reserve is the foundation for an enormous amount of the country’s
commercial credit. Of course, the banks and others holding practically
unsalable collateral for loans, that the borrowers were unable to repay,
were forced to help the borrowers and save themselves from loss by
continuing to hold them through the crisis for a better market. There
were many cases of this kind, particularly among the Trust Companies,
and there has been much slow and careful after-panic liquidation of such
collateral, and much of it has still to be done. It is, however, being
facilitated by the decided improvement that has taken place in the
market for first-class bonds.
Capitalists who for the past two or three years had been dissatisfied
with the returns of ordinary investments and who had gone into hazardous
speculations and extensive underwriting of new bond issues in the hope
of large and quick profits, have been sobered by their heavy losses and
are now seeking safety in prime investment bonds.
Had the market for bonds not improved as it has, it would have been
practically impossible for the New York Central and other Railway
Companies to have marketed the large amount of notes they have succeeded
in selling since the beginning of this year. The after effects of the
panic, as well as the panic itself, would also have been far worse than
anything we have witnessed had it not been for the previous heavy
stock-market liquidation, a liquidation that in many cases had been
practically continuous from the end of 1906, and that was most drastic
and disastrous in August, 1907.
That the banking situation has become normal is indicated by the
elimination of loan certificates and the resumption of normal methods by
all the Clearing Houses in the United States, and particularly by the
resumption of the weekly detailed bank statements by the New York
Clearing House. This occurred on February 8th for the first time after
their suspension on October 26, 1907, and was supplemented by statements
of the non-Clearing House banks and Trust Companies, including actual as
well as average conditions. This last is a new and commendable feature,
which every Saturday will enable us to learn how all the banking
institutions in New York City and its several boroughs stand, both
individually and collectively, in their average and their actual
condition.
That we are assured of a superabundance of money at low rates of
interest is evident from the large and growing accumulations of surplus
funds in the banks from Maine to California, and the light demand. All
the indications favor a protracted period of extreme ease in the money
market, modified only by gold exports and the withdrawal by the
Government, from time to time, of some and probably a large part of its
deposits in national banks. This again reminds us that the Sub-Treasury
system makes the Government an unlimited hoarder of money, with only
evil results. This, alone, calls for its modification.
But while the large aggregate of the surplus funds of the banks
testifies to the return of confidence, and with it the return to banking
channels of hoarded money, it also reflects the dullness of trade and
much idle machinery and unemployed labor. Hence the bank clearings of
the United States in January were twenty-five per cent less than in
January, 1907. This condition of affairs has been and still is severely
felt by the Railways, whose largely reduced gross and net earnings and
long lines of empty cars tell why a number of them, like many industrial
corporations, have reduced or passed their dividends, or paid them in
scrip. More railway and industrial corporations will probably have to
accommodate themselves to circumstances and do likewise in consequence
of reduced earnings. That we expect, and are prepared for, while the
trade depression lasts, and hence we all hope and trust it will be
short.
Meanwhile we cannot ignore the political situation in this Presidential
year, and the disturbing and depressing effect of the recent message of
President Roosevelt to Congress, with its onslaught on Wall Street,
followed by the unjust bitter attack of Mr. Bryan on Stock Exchange
speculation, which he denounced as gambling. Wall Street was thus ground
between the upper and nether millstones of the Republican and the
Democratic parties; it was fired on from both sides with hot shot, grape
and canister, without any good reason.
Speculation in stocks, as conducted through Stock Exchange brokers, is
no more gambling than speculation in real estate or ordinary
merchandise. All trade is more or less speculative because it involves
risks. If it did not involve risk there would not be so many mercantile
failures as there are every year, yet no one calls trade gambling. Every
time a merchant buys a line of goods, he makes a venture, not knowing
whether they will rise or depreciate in market value on his hands. He
buys also on credit, just as he gives credit to his customers; and what
is the difference in principle between this form of credit and the
credit a stock broker gives his customers who pay ten per cent on the
par value of their purchases while the broker provides the balance and
holds the stocks as security? This is the margin, which is a credit in
the account of each of them; and I call it a credit instead of a margin,
which is a better word for brokers to use.
The present anti-speculation crusade is accompanied by many delusions
and very imperfect ideas concerning the conditions and equities of
business operations. Who is to decide which are speculative transactions
and which are not? Business cannot be conducted without making contracts
entering into the future, and that is speculation. The builder who
contracts to build you a home is a speculator; the manufacturer who
agrees to deliver a thousand cases of cotton goods sixty days hence is
dealing in futures, and all operations extending into the future are
unavoidably of a speculative character. Even marriage is often called a
lottery. It is quite impossible and thoroughly stupid to try to
eliminate speculation, for it is an essential element in all business
transactions, except those for cash. If business were reduced to the
latter basis, it would soon become injuriously restricted and more
exposed to corners and violent fluctuations than ever.
As to legitimate or illegitimate speculation, who is to decide between
the two, and where is the line to be drawn? If the investor buys
securities in advance of his income, expecting to complete the purchase
later on, is that legitimate? Suppose circumstances compel him to change
his mind and sell before his original purchase is completed, is that
legitimate? And in what respect does such a transaction differ from the
ordinary marginal contract? It may, perhaps, differ in intent; for the
speculator usually buys with a view to taking advantage of temporary
fluctuations. Yet, who would be bold enough to investigate the
intentions of buyers or sellers? Only the most drastic kind of force
could compel divulgence of such secrets, and is it possible to establish
any such system of espionage in this country? Speculation, as often
stated in these advices, when confined to reasonable limits is
beneficial. It is the natural balance wheel of commerce and finance. By