present pace. We should not hold it, even if we could. Though our depositors do not realize this, our unpleasant but perfectly plain duty is to curtail their accommodation lines and force retrenchment. We are in an era of extravagance, both corporate and individual, of extravagance in enterprise and of extravagance in expenditure; extravagance as much beyond precedent as is our feverish business activity. No matter what this country's book-profits are, it cannot accumulate capital without thrift, and today thrift appears to be forgotten. At least a moderate amount of what is popularly known as "hard times" is the only cure.

Expansion is not confined to the industrial and commercial world. For years banking facilities have been expanding out of all proportion to the growth of cash reserves. For several years there has not been a week in which all the New York Clearing-House banks have held full reserves, and frequently half, or nearly half, have been short. The same tendency prevails throughout the country. Is it not time for bankers to check this undue expansion, to prune this tree too luxuriant for its roots, this fabric of credit built on an inadequate foundation of reserve? Consider that our reserves consist largely of balances due from other banks. The system of reserve agents, both in our state and national banking systems, with which you are all familiar, the abolition of which would be opposed by most if not by all the bankers in this room, contains possibilities of serious trouble; nay more, invites serious trouble.

For instance, a state bank near Buffalo receives a deposit of $10,000, which it redeposits with a trust company in Buffalo. The latter redeposits the amount with its reserve agent, a state bank in Buffalo; the state bank redeposits the amount with its reserve agent, a correspondent in Albany, and the Albany bank redeposits the amount with its reserve agent, a correspondent in New York City. Here is one $10,000 deposit, multiplied by five swelling discounts in this state by $50,000, and swelling so-called reserve by $42,500, against which the only cash reserve held is that of the New York bank, amounting to $2,500.

Is not this inflation? This is no imaginary case. Of course, each bank is supposed to keep a very small part of each deposit in reserve, in cash, but it frequently happens that each bank in the chain has a little surplus cash reserve, and that the operation is exactly as stated.

Now, what happens? The country depositor draws on his bank for $10,000, the country bank on the trust company, the trust com

pany on the Buffalo bank, the Buffalo bank on the Albany bank, and the Albany bank on the New York bank. Deposits shrink $50,000; $42,500 of reserve vanishes.

Thousands of such operations occur daily, the countless ramifications of which are so interlaced that their effects are widely felt. In ordinary times these operations pass without notice. When our next financial disaster comes they will cause widespread disturbance and promote panic. We should remember that most of the reserve cities in the national system have sprung up in recent years, and were not in existence during the panic of 1893. The system has not stood the test of a financial crisis. I know that country bankers desire interest on their reserve accounts, and that banks in reserve cities desire such accounts. Nevertheless, I advocate that whatever reserve may be required by law, that reserve shall be in cash in each bank's own vaults, and that the present system of reserve depositaries, both state and national, be abolished as most unsound and dangerous.

81. INDEPENDENT BANKING THE CAUSE OF INFLATION'

BY VICTOR MORAWETZ

The managers of each bank have the power to regulate the amount of its loans and discounts and the expansion of its deposit liabilities in relation to reserves, having regard to the condition of the particular bank which they control; but in the United States bank managers have no power to regulate the expansion of credits of all the banks with a view to the security of the general credit situation, and have no power, through the issue and redemption of bank notes, to prevent sudden and wide fluctuations in the credit power of the banks resulting from the fluctuations of the volume of currency used as a circulating medium. Though the managers of fifty, or of a hundred, out of the seven thousand national banks may be of the opinion that, having regard to existing or prospective conditions, the expansion of credits has gone too far, they have no power to accomplish any substantial result. They could restrict the grant of credits by their own banks, and so lose profitable business that would go to other banks, but they could not materially improve the general situation. This was the case prior to the recent panic. For months before the panic many intelligent managers of banks and trust companies knew that the

I Adapted from The Banking and Currency Problem in the United States, pp. 36-42. (North American Review Publishing Co., 1909.)

credit situation throughout the country had become strained, and accordingly, by restricting credits and by making call loans instead of time loans, many of them endeavored to strengthen their own institutions, but they could do little for the protection of the general credit situation.

The point to which bank credits throughout the country may be expanded with safety depends upon many circumstances and varies from time to time. A ratio of reserves to liabilities may be perfectly safe under certain conditions and quite unsafe under other conditions. It is a fatal mistake to assume that bank credits always can be expanded with safety to the maximum allowed by the reserve requirements of the National Bank Act. Recent experience has shown that though the minimum reserves required under the National Bank Act are sufficient in ordinary times, they are not sufficient at all times, and that credits may be expanded beyond the limit of safety although the legal ratio of reserves to liabilities be maintained. It is not sufficient to consider merely the rate of interest in Wall Street. It is not sufficient to consider the rate of interest and financial conditions throughout the United States. It is necessary to consider the whole world. The financial and commercial relations between the leading countries of the world are so close that any shock affecting financial conditions in one country would be felt by them all. A great war, or a financial crash in any country, would affect financial conditions throughout the whole civilized world.

It is necessary to consider, also, the prospective expansion of business and the prospective demand for credits and currency throughout the world. Furthermore, allowance must be made for events that cannot be foreseen. There are times when exceptional conditions render necessary an exceptional expansion of bank credits or of the currency as a temporary measure of relief, as, for example, when a panic is threatened by reason of the sudden withdrawal of currency in unusual amounts to be hoarded by depositors who have lost confidence in the banks. In such case, however, safety requires that, as soon as the immediate need of the extraordinary expansion shall have been removed, bank credits and the currency shall again be contracted to a normal limit.

There are in the United States approximately seven thousand national banks, besides more than twice as many state banks and trust companies. Each of these institutions acts for its individual interest alone, independently of the others, and the prevailing tend

ency of each at all times is to expand its credits to the limit permitted by law. The country banks lend their surplus resources in the form of deposits at interest to the banks in the larger cities, and the banks in the principal money centers commonly expand their credits as much as practicable by lending on call such sums as they deem it unsafe to lend on time or by discount of commercial paper. Each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. Each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans; but it fails to consider that, generally, when a loan is called the borrower is obliged to borrow the same sum from some other bank, although a high rate of interest may be exacted, and, therefore, that call loans affect the security of the entire bank situation practically to the same extent as time loans.

In the United States there is no way of regulating the supply of bank credits and of holding part of the potential supply in reserve for periods of financial stringency. Consequently, nearly always there is either an overabundance of money (meaning credit which the banks are ready to lend) or a money famine. It has been argued that the volume of credits granted by the banks depends upon business activity and upon the consequent demand for credit and not. upon the power of the banks to grant credits, and, therefore, that the willingness of the banks to make loans at very low interest rates has little effect in causing an expansion of bank credits. Experience shows, however, that the contrary is the case, at least in the United States. It is true that when there is loss of confidence and when business is depressed interest rates are low, because there is less currency in circulation and more in the bank reserves, while at the same time the demand for bank credits is diminished. It is true, also, that the willingness of the banks to make loans at low interest rates will not stimulate speculation and enterprise unless people have confidence and are ready to speculate and embark in new enterprises. But we know by experience that when people are in a mood for speculation and for business expansion low interest rates operate as a powerful stimulus to speculation and business expansion. A leading banker has said: "In the long run commerce suffers more from the

periods of overabundance [of money] than from those of scarcity. The origin of each recurring period of tight money can be traced to preceding periods of easy money. Whenever money becomes so overabundant that bankers, in order to keep it earning something, have to force it out at abnormally low rates of interest, the foundations are laid for a period of stringency in the not far distant future, for then speculation is encouraged, prices are inflated, and all sorts of securities are floated until the money market is glutted with them."

82. THE CHARACTER OF THE PANIC OF 18931

BY ALEXANDER D. NOYES

The panic of 1893, in its outbreak and in its culmination, followed the several successive steps familiar to all such episodes. One or two powerful corporations, which had been leading in the general plunge into debt, gave the first signals of distress. On February 20 the Philadelphia and Reading Railway Company, with a capital of $40,000,000 and a debt of more than $125,000,000, went into bankruptcy; on the 5th of May the National Cordage Company, with twenty millions capital and ten millions liabilities, followed suit. The management of both these enterprises had been marked by the rashest sort of speculation; both had been favorites on the speculative markets. The Cordage Company in particular had kept in the race for debt up to the moment of its ruin. In every month of the company's insolvency its directors declared a heavy cash dividend, paid, as may be supposed, out of its capital. In January, National Cordage stock had advanced 12 per cent on the New York market, selling at 147. Sixteen weeks later it fell below ten dollars per share, and with it, during the opening week of May, the whole stock market collapsed. The bubble of inflated credit being punctured, a general movement of liquidation started. This movement immediately developed very serious symptoms.

Panic is in its nature unreasoning; therefore, although the financial fright of 1893 arose from fear of depreciation of the legal tenders, the first act of frightened bank depositors was to withdraw these very legal tenders from their banks. Experience has taught depositors that in a general collapse of credit the banks would probably be the first marks of disaster. Instinct led them to get their Adapted from Forty Years of American Finance, pp. 188-93. (G. P. Putnam's Sons, 1909.)

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