THE CHICAGO 'BAATKE'R
Founded in 1898
Volume xxvii	CHICAGO, OCTOBER 9, 1909	Number is
Henry W. Yates Against a Central Hank
The occurrences of 1907 are constantly put forth as a sledge to force this kind of money upon the country.
The prominent financiers who press these schemes and denounce opposition as due to ignorance and prejudice, seem themselves to be entirely oblivious to the fact that the people of this country clearly comprehend the underlying causes of that disturbance.
There was no lack of currency at that time to meet the commercial uses of the country, but there was a lack of capital.
The banks in the great money centers had permitted their means to be absorbed in “undigested” securities, or in loans based upon them as security, and were not in a condition to satisfy the increased commercial demand for money (capital, not currency) which always comes in the fall. The stringent loan market and high interest rate, with the panic in the stock exchange, naturally caused distrust and brought on the catastrophe which followed.
It will be admitted that our banking system should be able to meet without undue strain, the operations of even freak bankers and speculators, but this may be accomplished without the aid of such drastic and doubtful propositions as those advanced.
Elasticity
It is said that our currency system lacks elasticity and that some means should be provided which will permit it to expand to meet the commercial demand for money.
Our currency is far more expanded and is no more rigid than that of Great Britain, the greatest financial power in the world. The rigidity of the British currency system has at times been denied and nearly always obscured by the advocates of asset currency.
The endeavor has been to induce the public to believe that this is the only country in the world with a rigid or restricted currency system.
Hon. A. B. Hepburn of New York City has an article in the October Century in which the strongest possible arguments for a central bank of issue are advanced. In this article he frankly concedes the fact concerning Great Britain.
He states the debt secured issue of the Bank of England is limited to 14,000,000 pounds (it is now 18,400,000).
Beyond this sum the bank cannot issue a pound, except of what corresponds to our gold certificates of deposit. Using his words “the currency of England therefore possesses no greater degree of elasticity than metallic money.” Notwithstanding this fact, with about one fourth of our money volume she manages not only her own finances, but the finances of the greater part of the world.
We should not allow dust to be thrown into our eyes by the assertion that there is no real difference between a bank note liability and a deposit liability.
Upon the bank books it is made to have that appearance, but in fact there is little similiarity. Circulation corresponds more with “capital stock” than it does with “deposits.” The loans and discounts made by a bank are from its own capital and the capital of others entrusted to its care and keeping. The note liability forms a part of this capital and is manufactured from its credit supported by government sanction to give the notes circulation. Deposits may be withdrawn by checks at the will of depositors, but
The able Omaha financier takes strong ¿round on a much-talked-of question of the day
This really constitutes the main incentive for its creation, just as it has also been in the many banking and currency reform schemes heretofore proposed for congressional action.
It is doubtless true that notes issued by a large capitalized central institution would not be attended with the same risk, as when issued by thousands of national banks separately. Whether
HENRY W. YATES Omaha, Nebraska
such notes would be safe or not is not the sole question under discussion.
Their ultimate payment would depend upon the management of the banks issuing them, whether large or small.
The chief objection is the conversation by law of personal credit into capital, through the issue of bank currency, and the consequent inflation of the money volume.
Any subsequent contraction of this volume, by the retirement of these notes, whether by payment or repudiation, would be attended with loss—not to the issuers of the notes who get their profit when they put them out and cannot lose, —but to the general public.
Panic of 1907
The necessity claimed for all currency schemes is the prevention of panics.
The question of a central bank from the support it is receiving in high political quarters has now become a real issue in our financial discussion.
The proposition as advanced by some confines its operations to transactions between banks.
It is difficult to see how a business so restricted could be made attractive to the capitalists who are expected to subscribe for the stock.
Deposits could be obtained by the offering of sufficient inducements, but banks as a rule are not borrowers. They become so only in times of great stringency, and these are infrequent and it may be hoped will eventually cease to occur.
The central bank must therefore necessarily find other means for obtaining loans and discounts.
To be a practical proposition, it should be vested with full power to do a general banking business, like the Bank of England and the Bank of France, and to make it of national operation, it must also maintain branches.
This is doubtless the form the proposition will finally assume. No matter in what shape it may be presented, such a bank must come into direct competition with the existing banks, and if the branch plan is extended generally, say as in Canada, it would lead to the destruction of our existing banking system. The credit and prestige of its government connection would give it great advantages over all other banks and this joined with the fact that these branch banks would be untaxed in communities where the banks are now called upon to stand so large a portion of the burden of local taxation, would inevitably result in the extinction of the latter.
The question at once arises “is there any crying necessity for such a change in our banking system and would it be beneficial to the country?” I think the question should at once be definitely answered in the negative.
These branch banks owned and controlled by men having no personal interests whatever in the communities where they would be established, could not render the same service to those communities as the present independent local banks.
In papers heretofore published, this writer has had occasion to show that our American banking system is a product of our American life and development and is peculiar to this country.
So far from being the worst banking system in the world as some writers have asserted, history will probably record it as the best. It will be judged by what it has accomplished and not solely by its spectacular display of weakness at a few irregular intervals.
These weaknesses are apparent to all, but a wise policy should lead to their removal and not tend to the destruction of the entire financial fabric.
Granting, however, that in some manner, a central bank could be made to harmonize with our existing banking system, there are a number of other objections to the scheme which would justify its rejection. Only one of these can be considered within the restricted limits of the present paper, but it is in the writer’s opinion the most important of all, as it vitally affects the public interest.
Unsecured Bank Notes
It is proposed to give to this bank the power to issue bank notes to circulate as money, without the bond security heretofore required.