Los Angeles herald., 1908-10-20

with unimportant exceptions thus bor-
rowed by the banks with the agree
ment that it shall be repaid in cash
on demand. Aside from certain gov
ernment and inter-bank deposits, the
banks give no security in return, no
evidence of the loan thus made to
them, save memorandum entry by
a bank clerk in a passbook held by
the depositor.
BY thus borrowing practically all of
the peoples cash. and large additional
aggregates of credit values, quite un-
necessary to discuss here, they became
plain debtors to their depositors in
1907 in the total sum of more than
$13 900. 900 000-an amount which is in
comprehensive by any except statis-
tical experts, and fivefold greater than
all the real money, gold, silver and
paper, in the country. These deposits,
these sums borrowed by the banks
from the men, women and corporations
of the United States, become legally
the absolute property of the respective
banks receiving them. In the absence
of statutory limitation which does not
now exist, any bank may thus law
fully borrow, returnable on demand,
twice. thrice, ten times the amount of
it's own paid-in capital. and then pro
ceed to lend practically rs per cent of
the whole on the time notes, secured
and unsecured, of business men and
concerns, and partly on other evidences
of debt. Thus they put beyond their
reach for periods ranging from thirty
days to six months a very large part
of the entire volume of borrowed
money, nearly all of which, as stated.
they have agreed to return to deposit
ors on demand and without previous
notice. This situation is noteworthy
Obviously such a business policy, with
it's vast inverted pyramid of bank in
debtedness. could only be justified as
to it's safety and practicability by the
existence of some saving law of nature
or Of economics whose operation is
certain and universal. Does such a
law exist?
Reciprocal Confidence Necessary
Here is the crux of the matter. If
by courtesy the present banking sys-
tenn can be said to have a foundation,
it consists of, first, an unthinking con-
fidence on the part of average deposit
ors, numbering millions, of all classes,
vocations and degrees of intelligence,
that their money can be and always
will be repaid on demand according
to the banks contract to that end;
and second the confidence of bankers,
supposed to be based on ascertained
economic laws, that in practice and
under the rule of averages only a
moderate and safe percentage of their
depositors will ever in fact demand
payment at the same time.
These twin assumptions, of deposit
ors on the one hand and of bankers
on the other, are manifest1y reciprocal
and interdependent. The soundness of
the one would assure the soundness
of the other; the collapse of one would
explode the other and the combination
would be in ruins. What is the fact
shown by a we'll illumined line of ex-
perience? Only one answer can be
given or attempted-the financial ca
tamaran sails admirably in fair busi-
ness weather; in times of tempest 1t
goes to pieces absolutely.
Collapse of Confidence During Panics
If, prior to the month of October in
the year of grace 1907, there was any
doubt that our existing banking sys-
tenn has no other ultimate basis than
the quicksand of twin fallacies herein
referred to- and that it requires rad
ical and immediate reform, that doubt
has been rudely and effectively re-
moved by the conclusive logic of
events. Without warning, without
precedent, without authority of law,
most of our $4,000 banks, including
practically all of those in the large
cities, simultaneously went out of
business without closing their doors
or going into liquidation: they abdi-
Gated their banking functions without
surrendering their charters; they failed
to meet their current sacred obliga-
tions to their Cepositors, including 9TH
er banks as well as individuals. by re-
fusing for weeks to pay their valid
checks when presented.
The Breakdown Last October
It goes without the saying that no
such spectacle was ever before wit
messed anywhere. IF ten or ten thou
sand leading and solvent merchants
and manufacturers should treat their
matured obligations as our banks thus
treated their depositors' valid checks.
which represented demand liabilities of
the banks, they would straightway
land in the bankruptcy courts. Appre-
hending trouble before it arrived, the
banks simply took the start of their
demand creditors, including sister
banks and individual depositors, and
audaciously assumed the risk involved
in heading off a strike of depositors
by first themselves calling strike
against depositors. They feared that
depositors, having lost confidence, were
about to make heavier Withdrawals
than many banks could stand, and so
adopted the only alternative that oc-
Cured to them.
Undoubtedly the immediate result of
this financial coup was greatly bene-
fetal, but the occurrence creates
situation and entails a responsibility
which will probably give the nation
little financial repose until it is met,
and met in right manner The sit
uation created is this: The phenom-
email action of the banks, however ef-
fective in stemming one rising panic,
was of course revolutionary in the
sense that it was subversive of fun
damental commercial ethics and time
honored banking practice and consti-
tutes a precedent which if followed
must quickly produce universal finan-
cial chaos and disaster.
Is that precedent to be followed, and
what is there to prevent such course?
If hereafter, when public confidence
falters and bad financial weather
threatens. our banks, encouraged to do
so by their recent lucky experience,
may run to cover in a similar manner,
it may prove that the nations recent
chased at too great cost. The only
ground on which the recent action by
bankers can be justified or excused
is that they were attempting to do
business under an antiquated banking
system which they found to be un-
workable under test that they now
admit its complete breakdown, and are
ready to join the rest of the commun-
ity in measures to produce salts
factory and enduring remedy.
Only by meeting this situation and
responsibility souarely and promptly,
and thus removing all seeming neces-
sity for, and temptation toward, a rep
etition of last autumn's tactics, can the
banks of the country avoid. what they
can little afford, a grievous loss of