7
July 4, iço8]
THE CHICAGO BANKER
the banks, which they were able to supply only by greatly contracting commercial credit.
We have just noted that foreign countries use bank note credit instead of bank book credit. How does this work in time of panic? To borrow a figure of Pres. Roberts of Chicago, there are two ways of stopping a runaway horse approaching a stone wall. We can head him up the hill thus letting him slow down, or we can run him into the stone wall with a smash-up. Our banks use the smash-up policy. They loan on and on at the usual rates till the crash comes! Not so the foreign banks. With a gradually rising rate the business man will hold in check any inclination to enlarge his liabilities. Make an effort to reduce them and he will have time to do all this. Thus foreign banks control the situation. Thus the 1907 panic caused a raising of the discount rate abroad 7 per cent in England, 7J4 per cent in Germany, but no bank failures to speak of. With us seventy banks went down in three months, and some of our strongest banks, too. Ours was truly the smash-up, save-the-wreckage method. The fact that so many of these banks are already reopened and doing business is proof that it was not their fault that they failed, but the fault of our whole, condemned banking system.
The panic of 1907 has some lessons to teach. What were the causes of this panic? Without affecting any originality, I may give the following catalog of causes all bearing on the panic:
I. Under world-causes, the Boer war, the Japanese war, the Spanish-American war, and the San Francisco earthquake. This wiped out $3,000,000,000 of capital.
peatedlv had experience with this species of asset-currency or emergency bank note issue.
Shall we conclude then that our thirteen billions of deposits and our occasional clearing house certificate afford us an elastic currency as safe, as elastic, and as convenient as the note issues of our neighbors ?
We must answer no, and for this reason. Our currency problem has come to be an agricultural one, the cities being already supplied with a currency of maximum elasticity, viz., deposits. The need for currency is urgent in the rural districts where capital is scarce, interest high, and deposit-currency not highly developed. Funds are needed to pay for farm labor, especially at harvest and crop moving time. Could banks furnish notes instead of deposits at this time “the necessity for withdrawing currency from the East would be avoided, as would also the return movement which creates a plethora of loanable funds in New York, unduly stimulating speculation and giving a wrong impression as to the plentifulness of capital and credit.”
It is very evident that in the light of the experience of our neighbors and in the light of our own experience, our present form of bank currency contains some radical defects. It is inadequate in ordinary times. It fails utterly in a panic.
The 1907 Panic
We don’t seem to know it all about panics yet, although experience has been teaching us many a sharp lesson. All our panics have been bank panics, in the sense that they were directly related to banks. Money has been demanded of
redemption at certain points fixed by law, and by order of the treasury board.
6.	Banks may redeem in gold or Dominion notes, but as a matter of fact they do redeem by draft on some commercial center.
7.	The life of a note is about one month.
8.	The security of these notes is two-fold, (a) the general assets of the bank, and (b) a five per cent guaranty fund. This has been found adequate. There is no tax or other artificial device for driving these notes home for redemption.
E. United States.
In the E'nited States to-day we have some 18,000 banks. Of these 6,500 are national banks, issuing notes. This currency is considered absolutely safe and absolutely inelastic. Being a bond-secured currency, it is open to the objections, in addition to its inelasticity, (a) of lessening the loaning power of banks, (b) of withdrawing funds from locality where needed to sections where funds are cheap, (c) of having a volume depending on the price of bonds, not the needs of commerce.
There is no question any more but that deposits and bank notes are alike, that "deposits are bank notes in disguise.” Only the notes circulate more freely and over a wider area. And, therefore, in discussing this problem of elastic currency, the real issue is not the elasticity of the currency—for all countries have that—but the form of the currency. We secure elasticity through deposits; France through bank notes; Canada by both bank notes and deposits. Let us examine our own currency, and see if it is not already elastic enough. Our 18,000 banks have $13,000,000,000 due their 15 million depositors. Deposits and loans fluctuate daily according to the needs of commerce. In the years 1900-1907 alone the national banks increased their individual deposits from $2,450,000,000 to $4,323,000,-000. And for the same period state banks and trust companies expanded their total liabilities by over 5,000 millions of dollars. There can be no shadow of a doubt about the power of our bank currency to expand. Its power to contract is even more self-evident. In addition to this normal bank currency we have a tested emergency currency, namely, the clearing house certificates. As England suspended her bank act in 1847, 1857, and 1866, so likewise did we suspend rather than break our banking laws in following cited cases:
1884. New York banks issue clearing house certificates for $24,915,000.
1890. New York banks issue clearing house certificates for $15,205,000.
1893. New York banks issue clearing house certificates for $38,280,000.
1893. Boston, Baltimore, Philadelphia, Pittsburgh, $25,000,000.
1907. New York, $100,000,000; Chicago, $37,505,00°; Philadelphia, $13,295,000; Boston, $11,995,000; St. Louis, $12,965,000; Pittsburgh, $5,853,000; Baltimore, $2,320,000; Milwaukee, $3,260,000.
Thus in 1907 we find eight cities issuing this emergency currency to the extent of $187,000,-000. Taking the whole country the issue easily ran up over $200,000,000. Thus we have re-
Peoples Savings Bank & Trust Co.
Capital and Surplus, $200,000 Deposits, $1,854,834.59
Solicits Accounts and Collections from Banks, Firms and Individuals on Favorable Terms.
C. W. LUNDAHL, CASH. AND SEC.
. GREENE, VICE PRES.
WM. BUTTERWORTH, PRES.
First National Bank of Joliet
Capital and Surplus, $250,000 Solicits Collections from Banks
GEORGE WOODRUFF. President	ANDREW H. WAGNER, Cashier
JOYCE & COMPANY
(Incorporated)
GENERAL AGENTS
The Rookery Bld£. CHICAGO, ILLINOIS
ILLINOIS ADVISORY BOARD Charles G. Dawes, Resident Vice-President A. J. Earling	David R. Forgan	John A. Spoor
Walter H. Wilson	M. J. Kirkman
COUNSEL
Calhoun, Lyford & Sheehan	Winston, Payne, Strawn & Shaw
ILLINOIS BANKERS
Place your Burglary Insurance and Fidelity Bonds in the company selected by the Bankers Associations of Missouri, Iowa, Minnesota, Wisconsin and Michigan.
NATIONAL SURETY CO.
OF NEW YORK