Panics have occurred in the United States under Democratic and Republican administra- tions; under a low tariff and under a high protective tariff. Free trade would not be a preventive here any more than it has been in England. The frequency of elections isnot the cause, as witness Russia, where there are prac- tically no elections held. Failure ofcrops can- not benamed as a cause, as the crop harvested the present year (1914) was the largest in our history. The failure ofthe StateBanks before the war was caused primarily by the inability of the banks to redeem their circulating notes in gold and silver on demand as agreed. It
wasnot caused b}^ the redundancy of the notes as is so often alleged as the following figures disclose
1857—
Bank notes in circulation $214,778,000 Other money in circulation 242,300,000
Total $457,078,000
Population 28,916,000
Circulation per Capita $15.81
32 THE EVOLUTION OF BANKING
If to the above we add the Bank Deposits which circulated by means of Bank checks, we have
Total notes andmoney in circulation....$457,078,000
Bank Deposits 230,251,000
Total $687,329,000
Circulation per Capita 23.75
1912—
Generalstock ofmoneyinthe U. S..$3,284,000,000.00
Population 95,237,000
Circulation per capita 34.45
If, to the above we add the Bank Deposits which circulatedby means ofBank Checks, we have
General stock ofmoneyintheU.S..$ 3,284,000,000.00
Bank Deposits 17,024,000,000.00
Total $20,308,000,000.00
Circulation per capita $213.20, or nine times the circulation per capita of 1857.
Now let us compare the condition of the Banks of the two years as to their ability to redeem their liabilities in cash.
Condition of Banks in 1857
Circulating notes outstanding $214,778,000
Due Depositors 230,251,000
Demand Liabilities $445,029,000
Cash Reserve 111,554,000
or 25.6percent.
Condition ofBanks in 1912.
Due Depositors $17,024,000,000
Cash Reserve 1,573,000,000
or 9.2 per cent.
These figures show in a startling manner some very pertinent facts. One is that the banks' percentage of cash reserve was three times as great in 1857 as it was in 1912. And
yet the panic of 1857 was the worst that up
to that time had ever swept over the country.
Every bank in the United States suspended.
Anotherfact disclosedisthat whilethe stock of money in the United States increased from
$15.81 to $34.45 per capita, or 118 percent, the liability of banks to their depositors increased from $7.96 to $178.75, or 2145 per cent. Or, in other words, while the stock of money in the United States a little more than doubled, the
liabilities of the banks to depositors multiplied
more than20times.
This explains why the banks demanded a Federal Reserve Act and got it. The banks are now in a position, in case of stress, to un- loadonthe UnitedStatesTreasury,throughthe Federal Reserve Banks and Federal Reserve Board, at their face value, a considerable por- tion of their assets in the shape of notes, bills of exchange, bonds, and other promises to pay, and receive Federal Reserve Notes, which are an obligation of the United StatesGovernment and payable in gold on demand at the U. S.
Treasury at Washington, D. C, or in gold or
lawful money —greenbacks, silver dollars, etc.
(butnot NationalBank Notes), at any Federal Reserve Bank.
The Banks, before the war, were forced to close their doors because they could not keep their promise to redeem their deposits and bank bills in coin on demand.
The panic of 1873 found the public in a dif- ferent frame of mind. The use of Greenbacks and National Bank Currency had accustomed them to the use of a paper currency based on the credit of the federal government. They
therefore, did not demand the redemption of their bank notes in coin, although they could have doneso. The demand wasforthe redemp- tion of the deposits in currency and this was
impossible as the issue of Greenbacks was lim- itedbythe ActofCongress, andNationalBank Notes could only be issuedupon the deposit of government bonds with the United States Treasurer. The Banks could not redeem their deposits even in paper currency. The same thing occurred in 1893, when 415 banks and more than 15,000 merchants failed with a total liability of over $500,000,000. Again, in 1907, the banks were run down by the public and resorted to various expedients and forced the public to use certified checks, cashiers' checks,
and clearing house certificates in place of money.
After over one hundred years of bitter ex- perience, it has at length dawned upon the minds of the American bankers that a bank system that carries demand liabilities of from four to ten times the amount of cash on hand
is an impossible system.
Andthe Federal ReserveAct, instead of pro- viding for an increase in the cash reserve, allows adecrease of30 per cent. This decrease in the reserve requirements gives the National Banks the right to loan over $800,000,000 more
credit.
In case of a run on the banks the loans thus made can be deposited with the United States Treasurer and Federal Reserve Notes issued to
them to the amount of two and one-half times the amount of gold the bank has on hand.
These Federal Reserve Notes are an obligation of the United States Government payable in gold on demand in Washington. There are
now $346,000,000 of Legal Tender Notes out- standing, which are payable on demand in gold, and the government has a reserve ofonly
$150,000,000 with which to redeem them if asked. Where the gold is to come from to re-
deem the Federal Reserve Notes, which will
certainly be issued some time in the future, is
a questionno onecan answer.
If the present financial system continues, its
future history will be but a repetition of the past. Panics and industrial depressions will follow one another with all the misery they entail.
A new system must take its place in which labor will be the standard of value instead of gold. The new financial legislation must be formulated solely with the view of increasing theproduction ofcommodities and their distri- bution among the workers who engage in the necessary labor. The interests of the possess- ing class must be ignored and the interests of the workers only considered.