der which this fund will fall below the legal requirements. This contingency is distinctly recognized by the plain provisions contained in the section named, prescribing what shall be done "whenever the lawful money reserve of any association shall be below the amount" of the required percentage of its deposits. The provisions referred to are that the bank shall make no new loans or discounts, except the discount of bills of exchange payable at sight, nor make any dividend of its profits until the required amount of reserve has been again accumulated. The reason for this is obvious. The depletion of a bank's reserve occurs either because the bank has loaned out or otherwise invested too great a proportion of the funds it has received on deposit, or that its depositors have withdrawn their money to an extent which produces a similar result. In either case the only safe and prudent course for the bank to pursue is to cease paying out money in any direction except to depositors until either through the collection of demand or maturing loans on the one hand, or the receipt of deposits on the other, the required proportion has been restored. The discount of sight bills of exchange is excepted because money invested in this way will be repaid immediately, and in this branch of its business the bank's customers will be caused no inconvenience and the commercial interests of the country be thus protected from loss which otherwise might ensue.

The provision of law governing the time allowed a bank to make good a depleted reserve is most lenient. It provides that the Comptroller may notify the bank to make good its reserve, and further that if it fails for thirty days thereafter to do this the Comptroller, with the concurrence of the Secretary of the Treasury, may appoint a receiver for the bank. However, before the Comptroller can send notice to any bank he must have reliable information that its reserve is deficient, and as the source of such information is either the report of its examination heretofore made once a year, but hereafter to be made twice, or its sworn report of condition made five times a year, some time may intervene before such condition becomes known to him. Again, when he is officially informed, the use of the word may both as to his sending notice and as to his appointing a receiver in a case of noncompliance with such notice, plainly leaves the enforcement of the law to the discretion of the Comptroller in either or both of these particulars. This power thus conferred upon the Comptroller is one that ought to be used with great prudence and caution. It would be not only unwise but would work great injury to the business interests of individual communities and the general public to exercise the authority thus vested in him at a time when arbitrary action must necessarily result in general disaster, and therefore in the interest of the public the discretion given to the Comptroller has always been used with moderation. It is this moderation which in an emergency has in numerous instances contributed in no small degree to averting widespread financial ruin. In this view there can be no question as to the legality and propriety of a bank's exhausting its entire reserve, if necessary, in an emergency, to pay its depositors, but for no other purpose, except to discount or buy sight bills of exchange, and where the withdrawal of deposits continues or is likely to continue no careful bank manager needs to be informed that not only must he cease to make new loans and discounts, but must replenish his exhausted stock

of lawful money by converting his resources into cash through collections of loans and discounts or selling securities, or where this is not possible by using these assets to borrow the money needed to enable him to meet his liabilities.

CURRENCY LEGISLATION.

The Comptroller has been urged to make some specific recommendation with respect to a revision of the law so far as it pertains to the issuing of currency. After a careful consideration of the question the Comptroller is of the opinion that, aside from the amendments heretofore suggested, allowing banks to issue circulating notes to an amount equal to the par value of the bonds held to secure circulation, and abolishing a portion of the tax on national-bank circulation, the public good will be best subserved at this time by making no radical change in the provisions of the law.

The financial situation of the past months was not the result of either a lack in the volume of currency, of which there is now a plethora, or a want of elasticity in the present system of issuing it, but arose from a loss of confidence on the part of the people in the solvency of the distinctively monetary institutions of the country. It is worthy of note and of serious consideration that at the very time the scarcity of currency for business purposes was at its height, the country's volume of currency was increasing the most rapidly, and the amount per capita was much larger than in any recent years. Under the same peculiar condition of affairs which marked the monetary situation from May to September, no system, no matter how elastic, or volume of currency however large, could afford relief. As long as confidence is destroyed and credit wanting, money hoarding will go on and additional issues but add to the hoardings and give but little, if any, actual relief. On the other hand, when confidence and credit abound there exists little need for an abundant circulating medium, because under such a condition of affairs the amount of actual money required to transact the daily business affairs of life is reduced to a minimum.

The statistics show that the volume of business carried on through cash transactions is on an average but 8.7 per cent, and as the monetary conditions of the country become more fixed and confidence in them established, cash transactions will decrease and credit transactions correspondingly increase. This fact is to be considered in connection with all plans having as their sole object an increase of the volume of banknote or other paper currency, and coupled with this is the further fact that no issue is so dangerous to a people's prosperity as a large paper issue, unless such paper rests upon a proper foundation, is absolutely redeemable and convertible into coin upon the demand of the noteholder, and surrounded with every safeguard as to supervision of issue and redemption.

In view of the fact that there is now a very great abundance of unemployed currency in the country, as shown by the daily money returns from the commercial centers, it would seem that whatever need appeared some months since for enlarging to any marked extent the circulating medium has now ceased to exist; and therefore Congress is afforded an opportunity of giving to the whole subject that

careful research and investigation which its importance in all of its bearings demands. It will not do to place upon the statute books any experimental legislation upon this subject, but whenever a new law governing bank issues is enacted it must be one that immediately upon going into operation shall command in every respect the confidence of the whole people and insure to them a currency as safe in every respect as the present one, but with none of its defects.

In the meantime it is respectfully suggested that Congress, either through a monetary commission created for such purpose or through the appropriate committees, obtain detailed information of the various systems of banks of issue now in operation, and also such information as is to be ascertained from skilled students of finance and practical financiers, that it may be able to formulate a system complete and harmonious.

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Annual Report, Comptroller of Currency (William B. Ridgely) [Sixtieth Congress, 1st Session, December 2, 1907, Pages 69-79]

Certainly since as long ago as the date of the San Francisco catastrophe there has been no lack of warning indications of financial troubles and possible business disaster. For at least ten or twelve years there has been an era of advancing prices and great industrial, commercial, and speculative activity in all the countries of the world. Credits have increased and multiplied until the limit has been reached in the amount of reserve money on which they must be based.

For at least two or three years, however, it has been becoming more and more evident that there must soon be a slackening of pace if we were to avoid a general and universal crisis in financial and commercial affairs. These conditions have been world-wide and not by any means confined to the United States. Crises of more or less severity have arisen in several important countries. As is always the case when there is a demand for liquidation, it first manifested itself in the stock market. For months there has been a more or less steady decline in stock-market quotations. Not only stocks, but the very best bonds, have dropped lower and lower in price. The difficulty in selling bonds has become so great that for several years many of the railways have had to raise money for their necessary expenditures and improvements with so-called short time notes, instead of regular bond issues, the rates of interest on such issues rising higher and higher and each issue being harder to place. Merchants and manufacturers of the highest standing and credit have found it more and more difficult to secure or renew loans and the rates have risen steadily for months past.

With such conditions existing we approached the autumn cropmoving period, when there is always more or less disturbance of credits on account of currency shipments and withdrawals of balances from the reserve cities. For a time it seemed as if there were good reason to hope that there might be no more than a gradual liquidation

which might be conducted in detail, one interest or line at a time, beginning with the stock market, and that while there might be a general decline in the volume of trade and the gradual liquidation of credits, it would not develop into a bank or commercial crisis. But during the month of October the collapse of a highly speculative corner in stocks, dealt in on the "curb" in New York-not even listed on any regular exchange brought suspicion upon an old, well-established national bank in the city of New York. Although examinations by the national-bank examiners and the New York clearing house committee showed this bank to be entirely solvent, with its large capital and a considerable surplus still beyond question intact, public interest had been aroused to such an extent that runs developed in New York City on a number of other banks and trust companies and some national banks between which and the bank first under attack there was known to be community of ownership and management. The national banks of New York City were all found to be solvent by the clearing house committee, and being supported by the clearing house banks none failed.

But, unfortunately, a few other banks and trust companies were not in such good condition, and many of them, not being members of the clearing house or any similar association, they were not so well prepared for cooperation and support of each other. The Knickerbocker Trust Company, with $1,200,000 of capital and $48,387,000 of deposits, closed its doors on October 22, and this was followed by a large number of failures among smaller banks and trust companies. During the months of October and November ten State banks and trust companies, two of which have since resumed, closed their doors in New York City and vicinity. There were long and serious runs on two large trust companies, which were only kept from failure by the support of the other trust companies and the clearing-house banks. One national bank, the First National Bank of Brooklyn, which was clearinghouse agent for two large trust companies in Brooklyn which had failed, was compelled to close its doors on October 25 in order to avoid the responsibility for the clearings of these trust companies, and is now in the hands of a receiver.

On October 26 the New York clearing-house banks decided to issue clearing-house certificates for use in the payment of balances, and to limit, if not suspend, the shipment of currency to out-of-town banks. In this the New York banks were followed by those of the other central reserve and most of the reserve cities. The result was to at once precipitate a most serious bank crisis and a famine of currency for pay rolls and other necessary cash transactions. All domestic exchanges were at once thrown into disorder and the means of remittance and collection were almost entirely suspended. Money has been withdrawn and hoarded by individuals, corporations, and even more, perhaps, by the banks themselves, all of whom at once drew and held all the money of any kind they could obtain, often really in larger sums than needed.

It has been one of the peculiar features of the situation that there has actually been more of a panic among the banks themselves than there has been among the people. The banks have been fearful as to what might develop, and finding their usual reserve deposits only partially available, if available at all, they have been compelled in

self-protection to gather from every source all the money they could possibly reach and to hold on to it by refusing payment wherever it is possible and satisfying their customers with the smallest possible amount of cash. It has been remarkable how patiently and with what forbearance the people in the business community generally have borne with the situation and helped the banks to deal with the emergency. With the exception of the first excitement in New York and some smaller runs in other places, there has really been surprisingly little excitement or uneasiness among the people.

The greatest hardship to business generally has been the derangement of the machinery for making collections and remittances. As can readily be seen, this has interfered with every kind and class of business and led to great curtailment of business operations of every kind. Factories have suspended, workmen have been thrown out of employment, orders have been canceled, the moving of crops has been greatly retarded and interfered with and exports have fallen off at a time of the year when they should be at their highest. Another result has been a reduction of the volume of the foreign credits available just at the time they are most needed to offset the large imports of gold which have been made.

CENTRAL BANK OF ISSUE AND RESERVE

The conditions which led to the panic of October and November, 1907, were not due to the failure of a few individual banks. They were not due to the lack of confidence of the people in the banks, but more to a lack of confidence of the banks in themselves and their reserves. Banks have been fearful that the reserve system would break down, and in consequence it has broken down, and the reserve deposits have been only partially available. They were also fearful that not sufficient currency could be supplied to meet the demand, and as they all made the demand at once, there has not been sufficient currency. The result has been a currency famine.

The remedy for this state of affairs is to improve the reserve system so that the reserve deposits of the banks can be kept in a bank where they are surely and certainly available. We must impart to our currency system some element of elasticity, so that when there comes a sudden demand for currency it can be supplied in bank notes, without depleting the supply of reserve money.

These two most desirable changes can be best accomplished-in fact, they can only be satisfactorily accomplished-through the establishment by the Government of a central bank of issue and reserve. This is the system which has been adopted and found to work most satisfactorily in the great commercial countries of Europe and is the one that gives the surest promise of satisfactory operation in this country. Such a bank would not only solve the two great problems of our banking system, but it would also provide the machinery for conducting the Treasury operations in their relations to the banks with the least disturbance.

The chief weakness of our present national banking system is the provision in regard to reserve deposits, which piles reserve on reserve, in reserve cities and central reserve cities, without requiring a sufficient amount of actual cash reserve on hand. As we have seen in the