Offshore banking

“ Comment:—If we hope for our share of profit upon our foreign trade and if we hope to secure for the American merchant an equal opportunity in securing that foreign trade, we must prepare here two aids: one is banking facilities and the other is shipping facilities. Is it not perfectly clear that a foreign banker would do anything in his power to divert all the traffic he could over the shipping lines of his country? We shall find in the end then that our foreign trade will be aided not by our foreign bank alone but by American shipping as well. ”

“ 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. ”

“ The banks at that center, to which currency flows and where it is required in payments for merchandise, hold the power of controlling those in regions whence it comes, while the latter possess no means of restraining them; so that the value of individual property and the prosperity of trade through the whole interior of the country are made to depend on the good or bad management of the banking institutions in the great seats of trade on the seaboard. ”

“ Apart from this danger of the over-multiplication of credit on an inadequate cash basis, the complete absence of any legal or other restrictions on the operations of English banking enables it to work with extraordinary ease and readiness. As long as good unpledged security, whether in the form of bills of exchange, commodities, or Stock Exchange securities, are [Pg 455] available in the hands of customers the banks can advance against them to any extent that they consider prudent. ”

“ Another development is the registration of the British Overseas Bank, Limited, with a nominal capital of £5,000,000. The principal object of this institution is to carry on general banking business in all parts of the world. Four banks—two English, one Scotch, and one having connections with South America—are financially interested in the Overseas Bank.
Banking operations on a considerable scale appear to have been conducted by the ancients, and recent excavations have proved that in the seventh century B.C. banking was practised at Bagdad by a firm of Egibi & Sons. ”

“ Commercial banks are unique among financial institutions in that they alone are permitted by law to accept demand deposits. This distinctive power gives commercial banking a key role in the national economy. For banks do not merely deal in but are actually a source of, money and credit; when a bank makes a loan by crediting the borrower's demand deposit account, it augments the Nation's credit supply. ”

“ Meantime the interior banks were compelled to pay to exporting merchants generous premiums for exchange bills upon Europe, through which, despite the high interest rates ruling in European markets, these banks were able to import 107 millions of gold for their own reserve requirements. In fact, the banking business involves the hazard not merely that some of the debtors of the bank may become insolvent, but also the general and overhead hazard attaching to its underwriting service that it may itself in time of stress become unable to meet its obligations. ”

“ 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. ”

“ Whatever persons—one bank or many banks—in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at [Pg 668] once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion....
A domestic drain is very different. Such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. ”

“ We have witnessed not only the unrestrained use of bank deposits in speculation to the detriment of local credit, but we are also aware that this speculation was encouraged by the government itself. I propose that such speculation be discouraged and prevented.
Investment banking is a legitimate business. Commercial banking is another wholly separate and distinct legitimate business. Their consolidation and mingling are contrary to public policy. ”

“ Such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stock-market collateral. So far as would seem possible the Canadian Bank Act makes merchandise of all kinds a sort of collateral security for bank advances. It assumes that if a bank advances capital for the conduct of a business it should have a claim upon all the assets of the business and upon all goods as they come and go in the course of trade. ”

“ Then he noticed above all the great white columns of the Atlantic Trust and he realized that these were the first frightened outposts of the army of despair and panic which would come storming at the doors on the morrow. By the morning a dozen banks scattered over the city were besieged by frantic hordes of depositors, a dozen others hastily preparing against the impending tide of evil rumor and disaster.
With the opening of the Stock Exchange the havoc began, for with the threatened collapse of gigantic banking systems orders came pouring in from all over the country to sell at any price. ”

“ Prevention of indirect service to foreign shell banks- A covered financial institution shall take reasonable steps to ensure that any correspondent account established, maintained, administered, or managed by that covered financial institution in the United States for a foreign bank is not being used by that foreign bank to indirectly provide banking services to another foreign bank that does not have a physical presence in any country. The Secretary of the Treasury shall, by regulation, delineate the reasonable steps necessary to comply with this paragraph. ”

“ It has long been settled that one of the public policies embodied in the national-bank act was to secure the public credit and encourage the issue of notes to circulate as currency, founded upon the security of the bonds of the United States,-a purpose which would be directly discouraged by exempting a national banking association which reduced its circulation below 5 per centum of its capital from the payment of a duty thereon, and yet enforcing the payment of such duty against a national bank which had not reduced its outstanding circulation to the limit stated. ”

“ The result to the public is about the same in both cases; the bank has little or no specie, and its place is supplied by the notes of other banks. The great vice of the banking system in the United States is in banking upon paper—upon the paper of each other—and treating this paper as cash. This may be safe among the banks themselves; it may enable them to settle with one another, and to liquidate reciprocal balances; but to the public it is nothing. In the event of a run upon a bank, or a general run upon all banks, it is specie, and not paper, that is wanted. ”

“ Commercial banks can and do discourage certain types of enterprises by refusing loans with their securities as collateral, or by requiring very heavy margins with such loans, but even these may be developed, and are with us on a large scale developed, on banking credit, advanced by the speculators and private bankers who borrowed it from the commercial banks with other securities as collateral. ”

“ The mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from England to the United States, can best be effected by having the American house draw upon the English bank which wants to lend the money. In the finely adjusted state of the foreign exchanges nowadays, loans are continually being made by bankers in one country to bankers and merchants in another. ”

“ Will anyone deny that the sale and shipment by note brokers of billions upon billions of promissory notes from one state to another every year is not interstate commerce, but that to ship eggs, apples, potatoes, chickens, grain, cotton and live stock is interstate commerce?
I assert that it is just as proper and important that the National Government inspect this paper, and the banks that create it, or ship it, or buy it, as it is to inspect the sheep, hogs, cattle, slaughterhouses and the meat they turn out in order that it can protect the people of the United States. ”

“ A National Bank is forbidden to lend more than ten per cent. of its combined capital and surplus to any one firm or individual. "But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." Also no National Bank can lend on its own stock as security. ”

“ This new form of banking, due to the scope permitted under the present law, has been able to deal in business and to make loans on collateral which, while valid, is forbidden a bank under the statutes. The Trust companies, able to deal in more profitable business and to pay good interest consequently on deposits, have developed so enormously as to threaten to overshadow the banks. ”

“ It is a traffic unconnected with the trade of banking, dangerous for a great bank to hold, and now operating most injuriously in the South and West. It is the process which drains these quarters of the Union of their gold and silver, and stifles the growth of a fair commerce in the products of the country. The merchants, to make remittances, buy bills of exchange from the branch banks, instead of buying produce from the farmers. ”

“ All bank reserves should consist of gold or gold certificates, as soon as the United States notes can be converted into gold certificates.
Sixth: Every bank in the United States should be brought under national control, because banking is essentially Interstate Commerce.
Seventh: Every natural financial centre in the United States should become the clearing centre for all the checks, drafts and bank notes that are payable in the territory that is economically and naturally tributary to that Financial centre; such territory should constitute a commercial zone. ”

“ It could put the money in circulation by building Government railroads with it.
(4) And my opinion is that the whole sum could be benevolently assimilated by that Panama Canal business which the sleek Cromwell and his Varilla unloaded on the impulsive Roosevelt.
Second Question: Yes. We wage no war on private banks. As long as banks confine themselves to legitimate banking, loans, discounts &c., they are not a source of national danger. ”

“ In periods of general pressure or panic, other banks are not likely to be in a position to lend their own reserve funds or to consent to create deposit credit in aid of still other suffering banks. Not rarely the Bank of England, in the attempt to attract reserve funds, advances bank notes or deposit credit to importers of gold, without imposing the customary interest charge for the covering of the delays of the mint. ”

“ Even though a bank has a monopoly of issue in a country—like the Bank of France—it nevertheless is unable to expand its circulation beyond the people's needs. Such a bank, unless it should adopt a reckless policy of lending which would bring ruin quickly upon itself, can exercise very little influence upon the amount of currency in circulation. In a country like Canada, where several banks are issuing currency, no single institution can enlarge its issue of notes beyond the needs of its own customers. ”

“ That crises still degenerate on occasion into panics in America, but not in England, France, or Germany, arises primarily from differences in banking organization and practice. In each of the three European countries, the banking system as a whole is so organized by the prevalence of branch banking and the existence of a central bank that reserves which bear a small proportion to the aggregate demand liabilities of all the offices can be applied when and where they are most needed. ”

“ For a full generation before the war, the amount of ultimate loss to noteholders was too small to be reckoned as an appreciable percentage on the amount of currency outstanding, while the delays and minor inconvenience in the prompt cashing of the bills of broken banks were the result rather of the imperfect communication and exchange facilities of those days than of material defects in the banking system itself ”

“ Our banking laws must mobilize reserves; must not permit the concentration anywhere in a few hands of the monetary resources of the country or their use for speculative purposes in such volume as to hinder or impede or stand in the way of other more legitimate, more fruitful uses. And the control of the system of banking and of issue which our new laws are to set up must be public, not private, must be vested in the Government itself, so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative. ”