The country
reserves of cash were generally much higher on Decem-
ber 3rd than on August 22nd. Professor Andrew
says that " a large proportion of banks outside of
the three central reserve cities had accumulated
excessive reserves of cash during the weeks when
the panic was imminent, and then had protected
their holdings from withdrawal in the course of the
panic by the partial suspension of payments generally
agreed upon throughout the country." The country
banks increased their cash holdings from 40,000,000



202 PAPERS ON CURRENT FINANCE

to nearly 50,000,000 during the crisis ; the banks in
the forty reserve cities lost 5,600,000, but were still
above the legal minimum ; the only banks below the
minimum were those of the central reserve cities.
The New York national banks, however, held nearly
22 per cent, reserve. It was all very cautious, but
it was not banking.

It is noteworthy that the banks were officially
encouraged, even instigated, to suspend payment.
The governors of many Western States actually de-
clared legal holidays, which put a stop, of course, to
all monetary claims. In the State of Oregon these
holidays were proclaimed continuously from October
28th to December 14th, and in California from October
31st to December 21st. Incidentally, this suspended
the operations of the courts, and until Acts were
passed differentiating between a judicial and a finan-
cial holiday all judicial business was at a standstill.

The effects of all this on the public convenience
can be imagined. Perhaps the Stock Exchange
suffered most. " Call money reached 100 per cent,
and even 125 per cent., and was difficult to obtain
at those figures " [The Times Eeview of 1907].
Currency was at a premium from October 31st.
Even banks were known to have paid over 4 per cent,
for currency. A curious case was given by the Daily
Graphic of November 22nd : " One of the banks at
Boston has entered into a contract to pay a premium
of $48 per $1,000 for the gate receipts at the football



THE AMERICAN CRISIS 203

match between Harvard and Yale, to be played there
next Saturday." (If rumour is to be trusted, there
are English banks who would pay a premium to be
rid of some of the gate-money that came into their
hands last year !) But at that time money could
not always be obtained, even at the premium. A
newspaper correspondent, whose bankers had sus-
pended payment, found his gas bill due for $10. He
begged for time to pay, but was met by a threat to
cut off the gas. An American senator, who had occa-
sion to go from New York to San Francisco, told me
that he could only get from his bank enough to pay
his railway fare. He arrived at his hotel an absolute
pauper, and had to beg board, lodging, and pocket-
money from his host. These things were incon-
venient ; the really grave side of the situation was
the difficulty of paying wages and maintaining em-
ployment. The Steel Corporation paid 80 per cent,
of its weekly wage bill by cheque. Cash was at 5 per
cent, premium in Pittsburg ; and within fifty miles
of the city fifty thousand men had been discharged.
To meet the scarcity of money all manner of
irregular, not to say illegal, issues of currency were
made, amounting altogether, as Professor Andrew
estimates, to something like 100,000,000. The
United States are past masters in the art of currency
extemporisation. More than 50,000,000 of Clearing
House certificates were issued ; 5,000,000 of small
denomination, meant to go into currency. Besides



204 PAPERS ON CURRENT FINANCE

this, there were some 3,000,000 of Clearing House
cheques, and large amounts of cashiers' cheques,
manufacturers' pay cheques, and other forms of
currency issued by individual banks. " Most of this
currency," says Professor Andrew, " was illegal, but
no one thought of prosecuting or interfering with its
issuers. Much of it was subject to a 10 per cent,
tax, but no one thought of collecting the tax. In
plain language, it was an inconvertible paper money
issued without the sanction of law."

Meanwhile the Federal authorities were doing their
share. The Treasury made a Panama bond issue,
for the express purpose of enabling the National
banks to extend their note circulation, the money
subscribed for the bonds being largely redeposited
with the banks by the Treasury. This expedient
does not seem to have been a success. Mr. Noyes
says : " As for the Treasury's actual effort at relief,
through note and bond issues, nothing could have
been worse. Let no reader deceive himself into ima-
gining that they helped the situation. On the con-
trary, they complicated it : and when it was found
that the banks themselves were frightened at the
prospect of paying over their reserve money for
the new Government securities, when only 75 per
cent, to 90 per cent, of the cash subscribed would
be redeposited, the Treasury itself had to call a halt.
As is now generally known, only $24,631,000 out of
the $50,000,000 of 2 per cent, bonds offered on



THE AMERICAN CRISIS 205

November 17th were sold, and only $15,436,000 of
the $100,000,000 offer of 3 per cent, notes. The
issue was stopped by the Government chiefly because
of the protest of the banks themselves against it."
Large additions, too, were made to gold resources.
All the United States mints, according to a Times
cable of November 2nd, were working day and night
coining money to meet the currency demand. The
Board of Trade estimated that just before Christmas
1907, when the drain ceased, 18,000,000 had been
withdrawn from London on United States account ;
" a conservative estimate," Mr. Leppington says. Here
we may note that the premium on currency had its
good side. It enabled New York to import gold
against an unfavourable exchange. During Novem-
ber 1907, the exchange on London was almost con-
stantly above the normal gold export point. Yet
about 13,000,000 of gold were actually imported
into the United States in that month from England
and elsewhere. It is a minor point, but it is curious
to observe that these large shipments of gold raised
the cost of transmitting gold, and therefore raised
the gold point of exchange. According to The Times
of November 1st, the rate rose from Is. per cent, to
7s. 6d.> and even as high as 12s. 6d. later. The ex-
planation seems to be partly that the cost of insurance
rose, owing to the large consignments .of gold going
out in a single vessel (the Lusitania).* This gold is

I 1 Now world-historical.]



206 PAPERS ON CURRENT FINANCE

only just returning to England. The shipment of
280,000 to the London City and Midland Bank, and
other shipments received about the same time,
estimated to amount to nearly a million sterling,
were said to be the first made direct to this country
from New York since June, 1907. I see we are
getting a large shipment of eagles this week, and the
Bank reserve is rapidly improving.

I cannot pretend to follow out the effects of the
crisis to-night. They are world-wide in their range
and are far from exhausted yet. My interest is
rather in the causes which provoked and aggravated
it. But I may note some of the immediate results.
Monsieur Thery estimates the total failures in the
United States as about 90,000,000, the trading
failures amounting to more than 40,000,000, and the
bank failures to nearly 50,000,000. In New York
State alone twelve banks failed for 20,000,000.
According to the Railway Magazine, March 1909,
" no less than twenty-three railroads went under,
the aggregate mileage of the lines being over eight
thousand miles. The funded debit of the defaulting
roads was well over 54,000,000, whilst the stock
capital exceeded 65,000,000 hence the interest on
about 120,000,000 of capital was in default." Still
the United States railways have seen worse times.
The slump in securities was perhaps unprecedented,
though much of it had taken place before the crisis
of 1907 broke out. Some of the largest railway stocks



THE AMERICAN CRISIS 207

fell fifty per cent., many more from twenty to thirty
per cent. ; and the total fall in the securities listed
on the New York Stock Exchange is estimated at
1,000,000,000. This fall bore no relation to move-
ments in intrinsic values ; it was almost entirely due
to monetary causes, and the greater part of it has
already been recovered. I have not time to discuss
the most important consequences of the panic I
mean the enormous increase of unemployment, and
the general disturbance of trade. But I should ima-
gine that the damage sustained by the world through
the general industrial dislocation was at least ten
times as large as the part of it represented by actual
failures in the United States. The Unions reported
thirty-four per cent, of their members as out of
work in December 1907, as against 12*8 per cent, in
December 1906, when they were also suffering from
financial stringency. Six hundred thousand steerage
passengers went eastward in the winter. There are
always a certain number who go eastward at that
season, but this was more than double the usual
number. On April 7th, 1908, it was estimated that
no less than 4,750,000 mechanics and labourers (not
including agricultural hands) were out of work in
the United States ; that is, about twenty per cent,
of the total male adult population ; 750,000 in New
York State alone. It is difficult to realise, impossible
to exaggerate, the mass of misery implied by these
figures. If it is the case, as I certainly think it is the



208 PAPERS ON CURRENT FINANCE

case, that the greater part of this wreckage was pre-
ventible, it must clearly be the duty of all concerned
to discover and apply the necessary remedies.



REMEDIAL LEGISLATION.

In considering remedial measures, the first place
is due to those proposed by the American authorities.
The actual life of a nation, and the practical working
of its institutions, are so complicated by inheritance
of past experience and tradition, and so coloured by
the special genius of the people, that it is rarely
possible for foreigners to form a sound judgment as
to the precise forms which any necessary develop-
ments should take. As against this, the foreigner may
have a certain advantage in his detachment from
national customs ; and he may be permitted to say
how the situation strikes him from his outside point
of view. The experience of his own country in deal-
ing with problems not essentially different will in-
evitably provoke suggestions ; and if these are made
in the more general sense, leaving questions of detail
for the national expert, they may not be altogether
impertinent and valueless.

First, then, let me note the trend of the reforms
proposed, and the legislation actually put into force,
in the United States. The majority of reformers have
sought in one way or another to extend the note issue,
and especially to make it more elastic. It would seem



THE AMERICAN CRISIS 209

that they feel the rigidity of the reserve law, and
seek to compensate it by giving elasticity to the
currency. Others fix on the redepositing of the re-
serves as a main source of weakness, and propose
various methods of checking this practice. Others,
again, aim at encouraging banks to organise ; and,
finally, there are some who advocate a Central Bank,
though they seem doubtful whether the proposal
would be acceptable.

Special interest attaches to the first and only im-
portant legislation passed since the crisis, which may
be taken as some index to the points on which reform
was felt to be most urgently needed. As Mr. Shaw
had predicted, the panic was hardly over before a
temporary measure was under discussion. This took
the shape of a compromise, the Aldrich-Vreeland Bill,
which passed May 30th, 1908. 1 The Act contains a
mass of administrative detail which cannot be here
reproduced ; but, broadly, it has two main objects
first to provide for an emergency note issue, and,
secondly, to encourage organisation of the individual
banks on the basis of locality. The first section
provides for the formation of " National Currency
Associations" of National Banks for the purpose of
extended note issue. Other sections provide for the
issue of additional notes by individual banks upon

1 A reprint of this Act will be found in the Quarterly Journal of
Economics, Boston, August, 1908. The essential clauses are given in
Mr. Mason's paper before the Institute of Bankers : Journal, April, 1909.
F.C.F. o



210 PAPERS ON CURRENT FINANCE

the deposit of other than Government bonds, and by
associations of banks upon the pledge of commercial
paper ; such issues to be taxed at the rate of 5 per
cent, for the first month, with an additional tax of
1 per cent, for each later month, until 10 per cent.
is reached. Such issues, if made on commercial paper,
must not be in excess of 30 per cent, of the " unim-
paired capital and surplus (i.e. reserve fund) " of the
banks. Thus we get an elastic issue, somewhat on
the German principle, but with what seems the im-
provement that the banks have, in the increasing
time tax, a strong interest in reducing the issue to
normal limits as soon as possible. The Act further
provides that the banks shall pay not less than 1 per
cent, on Government deposits ; but they are exempted
from reserve requirements in respect of such deposits.
Lastly, the Act creates a National Monetary Com-
mission of eighteen members nine from the Senate,
nine from the House of Representatives to recom-
mend further changes dn the currency laws of the
country during the six-year period to which the Act
is limited. The Commission, I believe, is not ex-
pected to report for about three years. It has already
visited Europe, and is making an exhaustive study
of European banking systems.

We are told that the part of the Act that deals
with national currency associations has not been well
taken up. The individual banks seem to be reluc-
tant to assume the joint liability imposed by the Act.



THE AMEKICAN CRISIS 211

It is, indeed, as our own experience shows, very diffi-
cult to secure co-operation between really independent
banks, even for what are admitted to be the most
necessary purposes. The main result of the Act,
then, apart from the appointment of the Commission,
is to enable individual national banks, under certain
conditions, to make emergency note issues.

If, subject to the reserves above made, one may
venture to criticise this Act, conceived as a remedy
for the weakness disclosed by the crisis, one would
be inclined to say that too much stress is laid on
the question of currency, when the real fault lies in
the region of banking, and more particularly in the
attitude of the banks towards their reserves. This
has occurred to many foreign observers. As long ago
as January 1903, Mr. Lawson wrote in the Bankers'
Magazine that " elastic banking is required rather
than elastic currency." This seemed to me exactly
to hit the point. Mr. Boissevain, too, in the study
to which I have referred, says that he does not think
" the alleged inelasticity of the note issue is the main-
spring of the evil." It may be granted that when
notes are legal tender, elasticity of issues always has
a certain value in cases of general internal panic, and
in cases of exceptional foreign drains of gold. Yet
it is not so absolutely indispensable in countries like
the United States and Great Britain, where cheques are
so current. But elasticity of banking accommodation
is essential, whatever the system, in order to deal



212 PAPERS ON CURRENT FINANCE

with the ebb and flow of business and speculative
tides. To most of us it seems that the United States
reserve law prevents this elasticity by accustoming
bankers to regard their reserve as bearing a nearly
constant, regular proportion to their liabilities. Mr.
Boissevain holds that the legal requirement should
only be regarded as the absolute minimum, and that
there should be ordinarily a large surplus over this
minimum forming the real banking reserve. He
observes that people who constantly refer to the
elastic cause regulating the issue of the Reichsbank
often forget that, though at times, as on December
31st, 1907, it may have an excess issue of some thirty
millions sterling, its reserve is always well above the
legal minimum of 33| per cent. But it is asking too
much of ordinary human nature to expect individual
private banks to interpret legislation in this large and
expensive spirit. Nor does it seem to be necessary
for ordinary banks always to hold as a minimum
reserves on a 25 per cent, scale.

I doubt whether really elastic banking can ever
be enforced by legislation. The practice has gradu-
ally been established in this country, perhaps only
within the last sixty years, by a series of painful
experiences which have shown that only by the liberal
use of the reserves can incipient panic be allayed.
Where you have a mass of twenty thousand indepen-
dent banks, and no possibility of joint action, it is
even doubtful whether individual banks would be



THE AMERICAN CRISIS 213

justified in adopting such a policy. It will never be
really safe for them to do so until they are so far
organised or consolidated as to be able to reckon on
general co-operation in supporting the market. This is
one of the many arguments for the association of
banks which the Aldrich-Vreeland Act endeavoured
to secure. Canada, with its thirty great banks, and
Scotland, with its ten banks, owe much of their bank-
ing solidity to this power of co-operation. There are
obvious drawbacks from the public point of view ;
but in banking relations security is primary, and
worth paying for. It is noteworthy that the latest
news from Canada is that " the tendency towards
concentration of the banking business is not to be
ignored." Yet we are told that just across the frontier
the people of the United States are wedded to their
system of small local banks, and that banks of the
Scottish and Canadian type would not be possible
there. It is difficult to find any difference in the
general commercial conditions in the two countries
which would justify this opposition of views. The
greater scale of finance in the United States should
point the other way.

This brings me to the great fundamental issue,
upon which most European students of American
banking will be agreed I mean the supreme need
of some central banking institution, to do for the
United States what the great National banks do for
Europe. Many minor improvements are possible in



214 PAPERS ON CURRENT FINANCE

the United States system as it stands. The reserve
law might be made more elastic, the rate of interest
on redeposited reserves abolished or reduced, and the
whole system of redepositing modified ; the Trust
companies might be brought under stricter regulation.
But none of these reforms would touch the root of
the trouble. To put it briefly, American financiers
are too big, and her financial institutions too small.
The banks, which should control the big operators,
are too often controlled and exploited by them. The
central and authoritative control which is considered
necessary in London, Paris, and Berlin is certainly
not less necessary in New York. No market requires
it more. It is exceptionally liable to be swept by
waves of emotion, whether of panic or adventure;
its financial operations are unprecedented, both for
scale and audacity ; nowhere is speculation carried
to greater lengths. To the American financier, says
M. Thery, commerce and industry appear merely as
the material for his speculations. These conditions
seem to indicate the necessity for powerful banks,
organised under, or in some relation to, a central
controlling bank.

Plans for such a bank have been put forward from
time to time in the United States. Thus the Special
Currency Committee of the New York Chamber, in
October 1906, made this one of their alternative
recommendations. Their central bank was to be
jointly owned by the banks and the Government ; to



THE AMERICAN CRISIS 215

have the functions of the present Treasury, and to
rediscount for other banks. But in presenting the
report, the chairman observed that, " while the ideal
solution would be the establishment of a central bank
of issue, it was not likely that Congress would adopt
such a course." The difficulties are great ; we can
only hope it may be found possible to overcome them.
There seems to be a constitutional objection to a central
Federal bank. I used to think that the question of
State right was decided by the Civil War. But it
is clear that there is still a strong reluctance to assent
to the extension of Federal powers, and to all those
forms of centralisation which modern progress seems
to make inevitable. A feeling of this kind destroyed
the Second Bank of the United States, and it may be
strong enough still to prevent the foundation of a
Third Bank. Many persons consider that the des-
truction of the Second Bank was a great mistake, at
least from the banking point of view. But whatever
may have been the arguments in favour of a central
bank at that time, they are incomparably stronger
to-day. Now, as then, we want what Mr. Boissevain 1
calls a pivot for the whole system a bankers' bank,
dominating and leading the money market, a rallying
point in times of difficulty. But since 1834 new and
more urgent reasons for such a bank have become

1 Mr. Boissevain's whole argument and plan for a central bank in
the United States are well worth consideration. Mr. Boissevain writes
with the twofold authority of a practical banker and an economist.



216 PAPERS ON CURRENT FINANCE

apparent. The huge scale upon which modern busi-
ness is organised, to say nothing of the dangerous
licence of modern speculation, calls for a correspond-
ing development in the banking system. Moreover,
modern banking, and the problems of the modern
money market, are increasingly international. They
cannot be adequately handled from an insular, or
merely domestic point of view. It is a special func-
tion of great central banks, admirably discharged
by the National Banks of Europe, to consider the
international relations of the national banking and
finance.

The occasion of the crisis of 1907 naturally reminded
many persons of the crisis of 1893. The two greatest
monetary squeezes of recent times occurred in imme-
diate proximity to a presidential election, an election
turning in each case upon issues affecting powerful
interests. It is not surprising that in both cases it
has been asserted that the crisis was not a pure acci-
dent. After all, these world-resounding catastrophes
only repeat on a larger scale the minor market collapses
to which we are so well accustomed, and which are
every day and frankly attributed to an artificial origin.
But however this may be, for both in 1893 and 1907
there was much in the general situation that exposed
it to accidental disturbance, it is enough for us to
recognise that the power exists to cause monetary
stringency ; and that, however caused, such a
stringency may have effects, neither intended nor



THE AMERICAN CRISIS 217

convenient, which it is the business of sound banking
to avert. Panic is a dangerous force to unloose ; it
soon gets out of hand ; it is the first duty of the
banker to prevent its inception. To do this, however,
is beyond the power of the individual ; it requires
organisation. Powerful disturbing forces must be
controlled by institutions of proportional strength.

The simple, ingenuous harmonies of old-fashioned
political economy were built upon the assumption
that the competitors in the business struggle were a
crowd of individuals of something like the same order
of magnitude, fighting upon terms of rough equality.
I do not know whether there ever was an actual state
of society of which this was true ; it never was less
true than in the world of to-day. The assumption
has broken down all round, alike in industry, com-
merce, and finance. Everywhere increased inequality
has led to the revival of powerful organisations,
strong enough to exert control in the general interest.
Trade unions, employers' associations, chambers of
commerce, the great markets, trusts, and cartels
but I need not attempt to enumerate them all. It
would be strange if banking were to be the only
exception to the rule, and not less unsafe than
strange.

But banking is not an exception. Throughout
almost the whole Western world we find the banks
increasing in size, becoming more closely organised,
and headed by gigantic institutions representing the



218 PAPERS ON CURRENT FINANCE

national interests. The United States is not able to
resist the general tendency. Though her banks are
still rigidly localised, and she has recently permitted
banks of smaller size than before, some of the banks
in the central reserve cities are of very respectable
proportions. A certain control is exercised by the
Secretary of the Treasury. In normal times he en-
forces a somewhat minute and mechanical law on
the individual banks, and keeps a fatherly eye on
the whole system. When things come to the worst
he appears as the deus ex machina, and empties the
coffers of the State into the tills of the helpless banks.
What more could be desired ? The answer is that
this action of the United States Treasury, though it
is a testimony to the need for a central bank, does
not in any degree supply the place of such a bank.
The Treasury is not a bank, but a Department of
State. It is only connected with the banks through
its duties as controlling the currency, and the insti-
tutions which (and so far as they) issue currency.
By virtue of holding the Government deposits it has
a certain control over the market ; but this can only
be exercised by arbitrary measures of a kind which
seem open to much objection. It does not, and
cannot, act as a central reserve bank, nor can it
control the reserve policy of the banks. In short, it
cannot attempt to discharge the most important
functions of the ordinary European National Bank,
nor would it be expedient that such functions should



THE AMERICAN CRISIS 219

be discharged by a Department of State, even if it
were possible.

Larger banks, less localised, with more organisa-
tion and a more elastic reserve policy, centring in,
and under the leadership of, a great central bank
these would seem to be the sort of reforms required
to deal with the existing situation in the United
States. In this way she might obtain a powerful
banking system, able to keep in check the huge
financial forces of the present day, and to see that
the public interest receives no hurt. Whether such
changes are practicable or not we shall probably learn
before long. Meanwhile, the crisis of 1907 has a
plain lesson for us. It is clear that at present the
United States is the great storm centre of the
financial world. We should see to it that our own
reserves are strong enough to be proof against the
cyclones that may originate there.