Tellson's Bank

“ The unique powers of commercial banks to accept demand deposits, provide checking account services, and lend against fractional reserves permit the banking system as a whole to create a supply of 'money,' a function which is indispensable to the maintenance of the structure of our national economy. ”

“ It is thus that an introduction of a new bank into the most distant of our villages, places the business of that village within the influence of the money power in England. It is thus that every new debt which we contract in that country, seriously affects our own currency, and extends over the pursuits of our citizens its powerful influence. We cannot escape from this by making new banks, great or small, State or National. The same chains which bind those now existing to the centre of this system of paper credit, must equally fetter every similar institution we create. ”

“ Banks may indeed complain, that men of property are sometimes sending their money out of the country, at a time when it is already drained of its coin; that this raises exchange, and hurts the trading interest.
Exchange must rise, no doubt, in proportion as the grand balance is great, and difficult to be paid: But where does the blame lie? Who ought to provide the coin, or the bills for paying this grand balance? Have we not shewn that it is the bank alone who ought to provide coin for the ready answering of their notes? ”

“ If the King should think fit to allow his mint to supply coin, or bullion, for bank notes presented, at a determinate premium, he might by this operation advance the commercial interests of his kingdom, in facilitating the payments of a wrong balance of foreign commerce: but without that regulation, the bank will be perfectly sufficient for promoting and supporting domestic circulation. Every one who is able to give security for a certain interest, will be sure to find money: and as the expence of conducting such a bank will be very small, the interest for money will be very low. ”

“ The complaint is that the Eastern States have an undue amount of national-bank circulation, and therefore enjoy in a measure a monopoly. I admit this to be true. I will not discuss here the system of banking in all its aspects, but I will inquire how far the establishment of more national banks of issue in the West and South will remedy the real evil complained of—which evil consists in a lack of loanable capital there. If the remedy proposed is to serve any good purpose at all, then the establishment of new national banks of issue must increase the available amount of loanable money. ”

“ But the massing of this power in a few vast, centralised units has been a development of the last ten or fifteen years only. That is, it has been coincident with the development of trusts and combinations. Big Business and Big Banking have gone hand in hand. Each has made the other possible. By law a bank cannot loan more than one-tenth of its capital and surplus to any one customer. But the customers have grown into behemoths. ”

“ They put a hundred pounds into the till, and they lend out four thousand pounds on the strength of the other nine hundred. If they lend more than that, or lend that without security, they go beyond legitimate banking. Now you know as much as I do. A banker’s money is out on bills payable in two months or four, it’s out on the security of shares and farms and shop-stock, it’s lent on securities that cannot be realized in five minutes. ”

“ But banks do need a substantial margin of liquidity, to protect the rest. They get it from stock exchange collateral loans, and from ownership of listed and easily marketable bonds, primarily. They get part of it from true commercial paper. Thus, the director of a country bank in Iowa told the writer that banks in his section—where banks owned in large measure by farmers, and dealing largely with farmers, are very numerous and important—make a regular practice of buying, through brokers, a considerable amount of notes of outside merchants. They do this to protect themselves. ”

“ It purports to do no more than pay the debts of the Government with the redeemable paper of the Government, in which respect it accomplishes precisely what the Treasury does daily at this time in issuing to the public creditors the Treasury notes which under law it is authorized to issue. It has no resemblance to an ordinary bank, as it furnishes no profits to private stockholders and lends no capital to individuals. ”

“ Because of this necessary instability bankers watch most carefully the tendencies of the money market, and necessarily reduce their loans for safety when any anxious pressure begins. For the same reason legitimate banking is limited to short time loans—on demand, thirty, sixty, ninety days—the shorter being the safer. Laws sometimes prohibit a bank from dealing in any other business, where a stock of goods must tie up funds, or from speculation in real estate, which confines capital more certainly. ”

“ Hence they were trying to create an institution to issue currency, hold the government deposit, and equalize the exchanges without any real banking function. Nearly all the whigs except Webster treated with scorn and derision Tyler's notion of a national bank. He and his adherents were struggling with the notion of an Issue Department connected with the Treasury. It is not at all impossible that, if the plan could have been set on foot, it might have developed into a good solution of the currency problem. ”

“ But here, I say, there is no question of trade in which any risk is implied: and if any one can suppose, that, at any time, the affairs of a bank are in so ticklish a situation as not to bear inspection, that very supposition shews how necessary it is not to permit such a bank to continue this circulation. The only inspection, in which the 209public is interested, is to know the quantity of notes issued, and the extent and nature of the securities pledged for them. They have no business to examine the state of their cash, or of particular people’s credit. ”

“ Like everything else, the bank would have to be an evolution. Years would pass before it would work into its proper position and exercise its full powers. Gradually, it is hoped, the United States Treasury could be done away with, and the government taken out of the banking business. ”

“ If bonds were to be sold, it might act as financial agent to market them. If it bought them itself, it would lock up its capital and become a canal or railroad company, not a bank. It might make temporary advances before stocks were sold or taxes collected; but if the bank was to stay sound, these must run but a short time and payment must be strictly secured. If banks were used otherwise than in these limits, they and the improvements must all fail together. This is what happened. The Bank of the State engaged at once in a supply of capital for speculative operations at Alton. ”

“ Deposit banking operations affect not only the volume of money and credit, but also the value of the dollar and the stability of the currency system. In this field, considerations other than simply the preservation of competition are relevant. ”

“ The Treasury then takes money out of the banks and hoards it just at the time when the country most needs it. If the business boom goes so far as to strain credit to the breaking point, then the Treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. In recent years the Treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. In December, 1907, following the money panic, the special deposits in the banks by the Treasury had reached $256,000,000. ”

“ For blocks around the Bank of California stood a packed mass of pale-faced men, anticipating ruin. What might have become an unparalleled panic and almost universal wreck, was happily averted by the closing of the stock exchange and the practical suspension of business for a period long enough to allow the community to catch its breath.
Ralston stood the ordeal with all the resources of fortitude, met many patrons of the bank, admitted the grave conditions of its finances, but contended that its assets were very large. Everything he possessed in the world, he said, would be used to make good. ”

“ The bankers call for no more than their business requires. Could the bank, therefore, circulate the whole trade of London, the consequence would be, to issue as much coin as at present: and the coin which issues from bankers, like to that which issues from the bank, if it be for the uses of domestic circulation, returns to the bank in proportion as it issues: and if it be for payment of a foreign balance, the bank knows well that the expence of providing for that, must land upon it, in spite of every method to prevent it. ”

“ Now we have already seen that the banks find it necessary, in order to encourage deposits, to give a liberal rate of interest; and we have also seen that, whenever interest falls to two per cent, the deposits are gradually withdrawn, and a period of speculation begins. Let us hear Mr John Thomson, of the Royal Bank, on the effect of a gold currency on deposit accounts:—"I think, on the operating deposits, we could scarcely allow any interest, and on the more steady deposits, that the rate of interest would require to be very considerably reduced." ”

“ Branches in the West have been, some shut up, some withdrawn; and, in these cases, the Treasury was broken up, according to the new-fangled conception of a national Treasury. No! said Mr. B., the Federal bank is no more the Treasury of the United States than the State banks are. One is just as much the Treasury as the other; and made so by this very 14th fundamental article of the constitution of the bank. Look at it! Look at the alternative! Where branches are not established, the State banks are to be employed! ”

“ An institution might have been established with large capital, and a monopoly of the right of note issue, authorized to act as government fiscal agent, and to deal with the general public. Such an institution would presumably in the course of time have become a central bank, the main reliance of other banks in emergencies. In order to avoid competition with existing banks, the act provides that the receipt of deposits by the Federal Reserve Banks, and their normal lending operations shall be confined to those banks which subscribe to the capital and maintain balances with them. ”

“ With the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. For this reason, an institution like the United States Treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market. ”

“ Eight and a half millions of the bank capital, belonging to foreigners, must be drawn from us to Europe. Seven millions of the capital must be paid to the government, not to be loaned again, but to remain, as the President proposes, deposited in a branch of the treasury, to check the issues of the local banks. The immense available resources of the present institution, amounting, as appears by the report in the other House, to $82,057,483, are to be used for banking no longer, and nearly fifty millions of dollars in notes discounted, on personal and other security, must be paid to the bank. ”

“ On the other hand, when banks are in a good understanding, when they are established on solid principles, when their paper is issued on proper security, the public is safe; and in every little district, under the wings of their own bank, there will arise a set of exchangers, who will give credit to merchants and manufacturers, and who will have recourse to their own bank for the coin or bills necessary for their occasions. This will naturally divide the payment of the grand balance among them, in a due proportion to their circulation. ”

“ The partisans of the town banks are apt to pride themselves on their complete self-sufficiency. They forget that this is possible for them, not because they have sufficient funds in their own coffers to supply every credit need, but because an increasing part of their business is conducted through the trade bill of exchange, which is a marketable commodity that can be rediscounted by any outside bank, the Imperial Bank, the Dresdner Bank or any other. But agricultural societies, inasmuch as their loan papers cannot readily be bought and sold on the open market, require a special organisation. ”

“ And such banks would meet an incipient panic freely and generously; they would advance out of their reserve boldly and largely, for each individual bank would fear suspicion, and know that at such periods it must "show strength," if at such times it wishes to be thought to have strength. Such a system reduces to a minimum the risk that is caused by the deposit. If the national money can safely be deposited in banks in any way, this is the way to make it safe. ”

“ Banking is much more simple and much more safe, both for the banker and for the dealer, than in the old risky days. Panics are impossible. The wise action of the Bank of England, in connection with other monetary institutions, in averting a financial crash in November, 1890, by coming to the rescue of Baring Brothers with $55,000,000, began most auspiciously an eminently successful era of mutual help. ”