The evening times. [volume] (Grand Forks, N.D.) 1906-1914, 1911-11-17
Banking Control Under Aldrich Plan
ADDRESS OF j. LAWRENCE lAUGHLIN OF CHICAGO UNIVERSITY
BEFORE TRANS MISSISSIPPI CONGRESS

III
ADDRESS OF J. LAWRENCE la,
BEFORE TRANSMITS!
For Years n human organism, ma!
so on with poison within its tissues
suffering constantly and g%rievousl,
without the true being definite
ly determined. For decades our bust
ness community has been suffering en-
ormous losses from an unhealthy q
. dition OF IL banking and credit sys
tenn; but now we are beginning to 10
cate the disease. We notice that 9th
er countries are free from most u,
the frequent paroNNSmS Of credit witt
/ which We are afflicted. Then. We no
tice that, when Il reversal of bushes:
comes to us how perculiarly the pow
or of our banks Il lend to the bushes.
our u~nregulated credit system. 1t i:
to tho interest of the borrowing pub
lic-the producer. the tohbcr. the re-
taller. n their employees who depend
on prosperity for cmployment--to fint
Il remedy for this rigidity and for it,
losses. For II long time We have beef
thinking that this Rightly was due &c
issues: and there is much in hat he.
lief. But the difficulty With the note
issues i'll only a manifestation OF some
cause deeper down. which must he
reached before We a apply tho Of
fcrtiNe remedy Without doubt the
fundamental difficulty is to be found
in the rigidity and inclasticity OF ON
and the correction st the inelasticity
of our I circulation will go with it.
Let me make thi Scisar.
The business world regularly de-
Ponds upon an element OF borrowed
capital in conducting its legitimate
work of producing and exchanging the
commodities of general consumption.
When exceptional demands for cash
are made in the autumn for moving
cotton and grain. there is an increase
in the remand OF the banks for loans.
and the cash reserves decline. Like
wise. but on a greater scale. when Il
commercial collapse Comes. the pres
sure on the banks To meet exceptional
demands, either for extensions or new
loans. is appalling and dangerous.
The producer. who has borrowed to
pay for his materials or pay roll. can
not meet his debt, ii he cannot collect
from the iobber: the jobher. who has
borrowed to pay for the finished goods
cannot meet his Note. If he cannot
collect from the retailer: and the re-
taller. who has borrowed TO pay the
iohhcr. canno, meet his note. ii goods
are not salabir. Hence. If loans are
stopped. the whole machinery OF eN-
change to Il practical Standslill.
lust as an engine would stop ii Il
crowbar We're thrust into the cylinder.
There is just as much money as be-
fore in circulation. There is no lack
OF a medium of exchange. If Il MAJ
has funds on deposit. they can be
transferred by a check. What. then
is wrong" The rigidity of our organ
ization Of banking and credit
\ situation already dangerous is ag-
Eravated by the feeling that banking
preservation depends upon graspinS
by hook or crook for reserve money
When alarm is felt in this country.
there is nc other at present
but trying to heap up reserve money.
consequently. incidents which would
be easily taken care of in foreign
countries tend to bring disaster here.
The critical situation produced by an
unreasonable demand for cash hinges
upon n elemental fact to which our
public is usually blind. Demand obli-
cations in the form Of deposits are
principally the outcome Of credits re-
sultiEe from loans: and these loans
are commonly based. directly or in
directly on transactions in goods. such
rs cotton or grain. Hence these
l hlSdcl1ouS ana lTe resulting loans
and deposits are obviously far and
away greater in amount than the sup
ply of actual cash kept during normal
conditions in the hands of the public
or the banks. Now. when uniformed
persons begin to draw ASH for their
demand obligations at Il bank. of
course all cannot get it. The bank
has sound assets in the short-tintc
paper on which the loans are based:
y md fhiy Naf.or ra,,rc,sonf- or,nr1e ,rl,;<,l,
if business continues normal and suf-
ticient time is allowed. will always
liquidate the loan. But no reserve
can ever by any possibility equal all
the deposits.
Rigidity of Loans
Inder our present system of rigid
legal reserves and antiquated usury
laws, banks find it impossible to lend
just when loans are most needed.
When a reversal of business comes.
men ought to be given time to dispose
Of their goods and securities without
the frightful loss due to forced and inn
mediate sale. If legitimate business
men can be given a loan and time to
work out OF difficulty. ruin is avoided.
The safety Of the industrial and busi-
ness world depends upon the power Of
the banks to make loans. Under our
present banking organizations abso-
lutely destructive conditions arise. as
soon as danger appears. Whenever a
needless demand for cash arises-from
either individual depositors or from
correspondent banks-it draws down
reserves. The legal ratio Of reserves
to deposits is quickly reached ,and in
fact usually overpassedl. and the lend
ing power Of the banks is stranglcd.
This is Il crime against society. 1t
is diametrically opposed To The prac-
tice of the advanced countries of Eu-
rope. In Europe. in an emergency tho
banks increase their loans, and their
deposit Cor note) liability. and at tn
same time pay out their reserves: that
is, they work to aid the business pub
lie. In this country. We slam the door
in the face Of the borrower just when
he is in the greatest need. This is
why We have panics which other coun-
tries escape. This is why the great
business world is now demanding a
reform in the interest Of the borrower
and of the w~orkingman.
Compare the accounts of European
and American banks in times of crisis.
The former show that at the height of
the pressure. the note or deposit item
was in every instance largely in
creased because Of new loans. while
the cash reserves were freely paid out;
that is, the banks retained their lend
ing function and aided the business
pubic just When help was most
needed. On the other hand. with
slight exceptions. the accounts of our
country and reserve city banks. in
such panics as 1893 and 1907. show a
liquidation and decline Of the depnsi,
item. due to a refusal to extend or 10
make new loans. while the cash re-
serves actually increased. instead of
being paid out; that is. when reserves
fell TO the legal limit our banks sud-
denly abdicated their lending function