asked in the private debates at Washington as to why the AldrichVreeland reserve money was never to be availed of. One party said: "No bank would borrow money of the government at 6% and loan it out again with the rate increasing 1% per month. In a short time it would be 10% money. Senator Aldrich says the Act is unworkable and cannot be amended to work."

Thereupon a modest senator replied: "The intention of that Act was 10% reserve money. It was never meant that the currency should issue until money was 10%."

"How can you say that?"

And the senator responded: "I can say it because neither Aldrich nor Vreeland wrote that Act. I can say it because I wrote it myself and the intention of the so-called Aldrich-Vreeland Act was to supply money at 10%."

As amended in December by the present Congress the Aldrich Act now reads:

"For the first three months a tax at the rate of three per centum per annum *** and afterwards an additional tax rate of one-half of one per centum per annum for each month until a tax of six per centum per annum is reached, and thereafter such tax of six per centum per annum upon the average amount of such notes."

It has been previously noted in these articles that, during the three-year period in which reserves are being transferred from reserve and central reserve cities to the federal reserve banks, reserve city banks are permitted, for the first time, to keep reserves with each other. This may not be important, because temporary.

But toward the end of the same Section 19 there is a provision under which abuses may grow up. This provision is:

"In estimating the reserves required by this act, the net balance of the amounts due to and from other banks shall be taken as the basis for ascertaining the deposits against which reserves shall be determined."

It is a widespread belief that this is a provision copied from the national bank act.

It may surprise a great many bankers to learn that there is not, and never was, any such provision in the national bank act.

The national banks have been conducted now for many years as though this were a part of their constitutional provision privilege.

The authority, however, for this universal practice among national banks is to be found only in a ruling from the Comptroller of the Currency. It is now incorporated in law. It can be subject to some abuses.

Suppose a small bank losing $1,000,000 in deposits desires to conceal the same in its advertised or published statements. It has only to make an exchange transaction with another bank, and, with or without the passing of checks or drafts, banks, operating in conjunction, may credit each other with $1,000,000 of deposits, against which no reserve is required.

The desired covering up of the hole in a bank's deposits may thus be effected.

If it is answered that the Comptroller or the Federal Board would quickly detect this practice, it may be rejoined: How could it be detected if the banks were corresponding banks, and the balances were accumulated each as agent for the other in check collections?

Here is a subject for thought when, if ever again, Congress is called upon to discuss the question of bank deposit insurance. The only insurance in bank deposits is honor, and this cannot be had by legislation.

The Untermyer provision in Section 22, providing that other than the usual compensation from the bank, "no officer, director, employee, or attorney of a member bank shall be a beneficiary of, or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connection with any transaction or business of the bank," was meant, after years of agitation, to stop the payment of personal gifts or commissions in connection with bank loans.

But the act is so broad that a commission note broker cannot now sit on a board of directors and receive any part of any commission paid his firm for selling paper to or negotiating a loan at that bank.

Directors who are members of banking firms doing a commission business, or having bank accommodation, must consider this clause very carefully.

It is good opinion in legal and banking circles that, although this clause is much broader than was intended by its framers, the courts will construe it according to its language.

Therefore, the only safe course is for members of banking houses borrowing or doing business with any bank, to be sure they are not directors of that bank, or that their house does no business with or at that bank, directly or indirectly, while they are on the board.

There is only one way to insure this and that is to get out of bank directorates.

If ownership in the bank is such as to demand that a banking house have representation on the board, it must get somebody outside to represent it upon the board. If the substitute is not a dummy

director, he may very soon forget who placed him on the board, and there may be no loss in the efficiency of the bank direction.

But

if dummy directors are substituted, the efficiency of the bank direction will be impaired. The dummy director will be simply a reporter to the man who placed him there. Even in this position, it is doubtful if the dummy director could receive any compensation, or be in any way in the employ of the banker.

The proper method of maintaining bank direction efficiency, and complying with the provisions of this section, is to adopt the Carnegie system; make the employees of the bank the directors, and let the minutes of the directors' meetings be sent to the interested shareholders, who may thereupon promptly, as did Mr. Carnegie, return advice and suggestions.

The advising bank shareholder would then probably not come under the penalty for violating any provision of Section 22, the maximum of which is a $5000 fine and one year inprisonment.

Bankers should take note that this provision went into effect Feb. 23, or 60 days after the passage of the act.

XXVI

TIME DEPOSITS AND CALL LOANS.

One of the most sweeping changes that may take place under the new bank act will arise from the transfer of demand deposits to time deposits.

In Europe a majority of the bank deposits are on time. Rates of interest are scientifically regulated so that demand deposits draw very little interest. Deposits payable on thirty days' notice draw a fair rate of interest, and six months' and year deposits draw up to as high as 4%.

In this country the custom has been for almost everybody to feel that money in the bank is money in hand. Such is our spirit of freedom and independence that almost everybody hugs the delusion. of his own competence to invest his money either for a month or a year, and he therefore cares for no bank moneys, except those which are spot cash. But wisdom will eventually prevail in this, as in all other realms.

Time deposits are sure to grow under the stimulus of the new bank act, which cuts the required reserve on time deposits, defined as "payable after thirty days," to 5%. This definition was inserted in the first paragraph of Section 19, at the last conference before the passage of the act, and at the request of the country banks. President Andrew J. Frame of the Waukesha National Bank, Wisconsin, was as much responsible for it as anybody, and he figures that it will cut down the home cash requirements on this class of deposits to approximately 2%.

It is estimated that there are about $800,000,000 of time deposits in the national banks-time certificates of deposit were reported in October as $534,000,000. A provision which cuts down the new reduced reserve requirements by more than 60% further may stimulate the banks to invite their customers to mark a considerable part of their deposits as time deposits.

It can be readily pointed out now to any borrowing depositor that his deposit should be kept up to about one-fifth of his borrowings. Therefore a depositor borrowing $1,000,000 and keeping $200,000 on deposit, can be quickly induced hereafter to see the wisdom of assisting the loaning power of his bank by marking $200,000 of his deposit as subject to 30 days' notice. Should he desire to

check against his deposit below his time line, he will find it a little more mutually helpful to make a temporary borrowing of the bank, instead of a draft on his deposit.

He may thereby assist the bank in a central reserve city in keeping a part of its deposits in such shape that only a 5% reserve is necessary, instead of an 18% reserve, as required on demand, on the usual deposit account. Indeed, he need only start with a "time deposit," payable after thirty days, and thereafter all his deposit is "time deposit."

Such a practice extended through the country could very quickly cut the reserve requirements so that instead of $400,000,000 bank reserves being transferred to the Federal banks, less than $200,000,000 would be transferred. There would then be no necessity for rediscount with the reserve banks in making any instalment payments.

Therefore, the new Federal Reserve Board had best go a little slow in calling for more than $50,000,000, or one-half the subscribed capital.

A change of interest in brokerage circles is likely to follow the inauguration of the new banking system. It will be the making of brokers' call loans nearer in rate to mercantile time borrowings. In other words, time borrowings will come down, and demand loan rates will go up. The banks in central reserve cities, subject to great fluctuations by reason of their holding of other bank reserves, have been accustomed to keep their line of secondary reserves in brokers' and bankers' call loans at the lowest rate of interest, because of the quickness of the payments on call. When banks may step over to the Federal reserve bank and re-discount at, say, 4%, with commercial paper, they will have no necessity for their extended loans on quick call in bank and brokerage circles; and all borrowings, time and demand, will approach a more uniform rate of, say, between 31% and 41%-for a time.

The above change in the demand loan market, by reason of the transfer of the banks' secondary line of reserves from brokers' call loans to the Federal Reserve banks, will withdraw a great stimulus from stock speculation in New York and possibly in a minor degree as respects Boston and Philadelphia, which have the next largest stock exchanges.

When a broker, as in periods of easy money, is urged by his banker to make use of very low rate call money, the stimulus to the broker to solicit business throughout the country on a 4% to 6% interest basis, where he is paying only 2%, is very great. The broker not only gets the commissions, but can make an equal amount of profit on his interest account.