THE NATIONAL CITY BANK OF NEW YORK to the Banking and Currency Committees of the Congress of the United States. Also Copy of the bill as introduced June 26, 1913 Currency of the United States Senate Sir: Students of our banking situation are, I believe, in substantial agreement upon the main principles that should govern sound financial legislation. Briefly stated, the objects aimed at should be, (a) The mobilization of bank reserves. (b) The retirement of our present bond-secured circulation by a method fair to the banks which have been forced by law to buy Government bonds above their investment market value. (c) The authorization of a bank-note currency which will be responsive in volume to the demands of commerce, and which will lay upon commerce no unnecessary burden of tax through the fact that business men find it desirable at certain seasons to borrow the credit of a bank in the form of circulating notes instead of bank deposits. In this connection it should be clearly kept in mind that the main business of a bank is to exchange its credit for the credit of its customers. The customers' credit is known to but a small circle. The bank's credit is known to a wider circle. The business of banking is to exchange the obligation of the bank for the obligation of the bank's customer. Usually the customer prefers the bank's obligation in the form of a deposit balance, against which he can write checks. At certain times he may find it necessary to have credit in a form fit for wider circulation, and then he wants the bank's credit in the form of circulating notes. The volume of bank checks, by reason of their daily redemption, absolutely conforms to the needs of commerce. Legislation framed on correct principles will create a banknote currency that will as truly conform to the demands of commerce, avoiding alike redundancy and insufficiency. (d) The creation of a discount market. Legislation properly providing for acceptances and for the rediscount of such acceptances by a reserve bank will give to commerce the use of several hundred millions of capital that now forms the secondary reserve of commercial banks, and that must be so loaned that a bank can at any time shift the investment into other hands and convert the loan into reserve. The present call loan market is the inevitable result of that necessity on the part of all commercial banks for a secondary reserve, and of their inability under our present laws to invest that part of their funds in commercial paper and then dispose of that investment if the exigencies of the bank's business require a draft on the bank's secondary reserve, for the replenishment of cash reserves. Aside from the economic principles directly involved there are two or three other considerations that legislators must bear in mind in formulating legislation. There is no other statute of so much importance as the National Bank Act that has been on our books for fifty years without substantial alteration. We have grown used to its operations; to its advantages, and to its shortcomings. The shortcomings have been obvious, but the conservatism of Congress and of business interests has been such that there has been no substantial change in the law. It would now be one thing to take a clean sheet of paper and write an ideal banking law, but it becomes quite another thing There is another feature of great importance that must be kept in mind. There is a fundamental difference between new legislation affecting the existing banking system and legislation designed to control public utilities. A bank and a railroad each perform public service, but there is a distinction in the nature of the two which legislators must recognize. There is no more fixed form of investment than a railroad. It cannot be moved; it must be operated; its owners cannot withdraw their capital and retire from the field or change the corporate form upon which the life of their investment rests. The railroad has obtained rights essential to its life by public grant, and it performs public service of a character making it peculiarly subject to Governmental control. On the other hand, there is no more liquid form of investment than a good bank. The total investment can be promptly liquidated and the capital retired from the field. A national bank has received no charter rights which make it impossible or even difficult for it to change the form of its charter and reorganize under state jurisdiction. On the whole, bank investors have in recent years favored the state charter over the national charter. The evidence of that is found in the far more rapid growth in the number of state banks as compared with national banks. In 1896 the number of state banks and national banks was exactly the same. There were 3,700 banks under each form of charter. Thirteen years later the number of national banks was under 7,000, the number of state banks over 11,300. |