The Saint Paul globe. (St. Paul, Minn.) 1896-1905, 1897-07-21

Our national banking law requires each
DahK' IN the central reserve cities of New
YORK chicago and st. Louis, to keep in its
own vaults in actual cash at least % per
cent of its liabilities, and in other reserve
cities at least Is per cent, which are very
large percentages, and yet on account of their
isolation, seem frequently to be too little rath-
er than too much.
According to the last report March 81 the
reserve held in the central reserve cities was
SS,4o per cent and In the other reserve cities
500 per cent, which Is an eXtravagant use of
money, and yet there Is not one Of them
but. If a panic was in sight, would call loans
and scramble to increase the percentage of its
money reserve, regardless of the effect upon
his customers or his neighboring bank. Self
preservation would demand it. There is no
connecting link except the rope of sand of
their clearing houses connecting them in such
a manner as to create a chain Of mutual de-
pendencies. In case of attack the banker re-
allies that, if continued long enough, he
must succumb. His money will be drawn out
ana deposited in some other bank, which,
for the moment, has the confidence of the
panic-stricken depositors.
Under the English system it is different. In
LONDON all the banks keep the principal part
OF their money reserve at the Bank of Eng
land. These aggregated in one mass makes a
quantity Of gold sufficient to pay the last
dollar of the depositors in any one bank. But
II Will be said the Bank of England would
not thus pay out all of its gold. Certainly not.
Neither would it be necessary in order to
pay the entire deposits of a dozen banks,
q having uepoSllS equal TO the whole STOCK
of gold. Because as fast as drawn out of
the suspected banks it would be deposited in
some other bank, which in turn would de-
post it with the Bank of England, whose
STOCK would thus be forever replenished.
ENGLISH BANKING SYSTEM.
That you may not regard what have said
about the strength Of the English system. as
compared with the American want of system,
as a nipple untried theory. 1 will cite only
one OF many historical events which sustain
my position.
In 1890 the important house of Barring Bros.
& Co., of London, was compelled to make an
assignment, having liabilities amounting to
the enormous sum of $500, 900, 900, nearly equal
to the present interest bearing debt of the
United States government. A few days later
the unimportant house of Decker, Howell &,
Co., of New York, was compelled to make an
assignment, with liabilities of only $12, O0O.-
600. Each firm, as it afterwards developed
had assets sufficient to discharge all their
liabilities and more.
The banks of London did not hesitate to
take over the assets of Barring Bros. & Co.
as collateral. and assume all of their i'm
mense liabilities. and there was no alarm
about the %solvency of the banks.
What happened to the banks of New York
upon the failure of Decker, Howell & Co?
An extract from the Financial Chronicle of
the 18th of November, 1890. tells better than
l can tell it. The Chronicle says:
The failure of Decker, Howell & Co. in
VOWED the North American company, and so
embarrassed the Bank of North America that
the bank, could not meet its balances at the
clearing house. The Mechanics and Traders
bank and the North River bank found them
selves in a similar predicament.
The situation was now alarming, and
prompt action was necessary to avert a catas-
trophe of extensive proportions. Confidence
IN stock values was completely gone and con-
fdence in the stability of the banks was in
danger of becoming impaired. Doubt in the
latter regard, II not speedily diSpelled, meant
general disaster. 1t could only be ~dispelled at
that stage of the trouble by common and
united action. and, recognizing this fact, the
banks decided to stand together, the stronger
institutions supporting the weaker, as on
former occasions. The effect has been very
beneficial Confidence has been restored, the
Bank of North America and the Mechanics
and Traders bank have been helped out of
thev embarrassment, and the clearing house
has found it necessary to issue but compar-
atiVely small amount Of the certificates-only
a few million dollars altogether"
The rate of interest in London advanced to
6 per cent upon the announcement of the fail
ure of Barring Bros. & Co., and in New York
to 1856 per cent upon the announcement Of the
failure of Decker, Howell & Co.
From the foregoing extract it appears that
the disconnected banks of New York city,
while possessing in the aggregate an ample
supply of money, only preserved their reputa-
ton, if not their existence, by creating for the
time being through their clearing house or
ganization a central organ-a heart-through
which the resources of all flow, as required by
the emergencies which came to either; prac-
tically, for the time being, a bank of the
banks.
Several emergencies during the last decade
have been met by organizing a temporary Bank
of England in the city of New York, in the
same clumsy and imperfect manner.
SAVINGS DEPOSITS.
The solvency of the banks. should be further
assured by eliminating the savings deposits.
Such deposits are a source of danger. There
is no relation between this class of depositors
and the banks as to entitle their deposits to
ha ool1od dpnnCitS They are SlmDiV lOanSh
The relation between this class and the ma
tional bank is simply that of borrower and
lender. The banks, in accepting TINS class
of money, become purely borrowers.
In times of panic, when the minds OF all
classes. of men become more or less unbal-
anced, the savings depositor is frenZled. IN
like the commercial classes, VINO keep open
accounts, and whose solvency depends to a
large extent, upon the solvency of the bank,
the savings deposition has nothing at stake
except the money which he has loaned.
1t is my contention that a proper organlza-
ton of the vast capital of this country,
through the fundamentally of a system Oh
banks would make loanable credits so plen-
tiful. and therefore the rates OF mtefes. 50
find profit in savings deposits. This would
leave such deposits for the savings oank;
which. when organized on the New hhgiamu
Man have mutual relations with each depos-
itor. 1t might be advisable for the govern
ment TO organize government savings banks.
COMMERCIAL CRISES.
The recent experiences of the commercial
classes ~justifes a consideration OF the proper
exercise of the banking functions during com-
mercial crises. Upon this problem the author
l have quoted says: of
Ever since the great monetary panic OF
1893 two conflicting theories nave preVdiieu as
To how the bank should act in a great COM
merc:al crisis. One theory, when we may
call the restrictive theory, holus thaI un9
bank, in a great commercial crisis, shoulu
vigorously restrict its issues and give no sup
mort TO commerce.; the other, which may De
called the expansion theory, holds that IN
such a crisis the bank should literally eXpend
its issues to support all such houses as can
prove themselves to be solvent. Now, since
1893 we have had ten commercial crises; the
restrictive theory has uniformly talleo' ana
the expansive theory has uniformly succeed
ed and saved both the mercantile anu the
banking worlds from ruin. .
Probably the most conspicuous example or
the success of the expansive theory was wit
messed on the occasion of the Barring failure
in 1890. Here was a failure of the first mag
nitude. which involved not alone england;
In fact. perhaps the commercial classes OF
the commercial classes of other countries,
because a large part of the Liabilities OF the
Earrings consisted of acceptances OF CONNER
cial paper drawn in foreign lands agalns! con
signnents of all kinds of foreign products,
not only to England, but to other countries.
Probably the public will never Know now
much the commercial communities are IN
debted to the London banks, under the lead
ership of the Bank of England and its then
governor. the Right Hon. William Lidderdafe,
for the expansion of the bank credits so
promptly and wisely exercised at that most
critical period.
The expansive theory is undoubtedly the
true theory. 1t stands to reason that, in such
emergencies, all commercial houses who can
prove themselves solvent should be allowed to
remain solvent and continue their business
operations. Such a course would evidently
minimize the hardships growing out of the
want of employment of laborers. the depreci-
atoms in values and otherwise, which always
accompany such crises.