A BANKING ACT TO END PANICS

By Senator Robert L. Owen.

SENATOR OWEN, of Oklahoma, who wrote this able interpretation of the Federal Reserve Act of 1903 for the Rand-McNally "Bankers' Monthly," was chairman of the Committee on Banking and Currency, and managed the passage of the Federal Reserve Act and Farm Loan Act in the United States Senate. Before going to the Senate in 1907, he was an Oklahoma banker and United States Indian agent.

In this important reform of the national currency, which was enacted in the first year of the Wilson administration, the control of the money of the country was taken from private hands and placed in the Treasury Department. The country was divided into 12 banking districts and the reserves of those districts were placed in certain cities so as to better serve the needs of the whole country and, by relieving the nervous strain imposed primarily upon the New York banks the reserve center under the old system avert panics.

MANY men n have claimed to be the author of the Federal Reserve Act. The fact is, the Federal Reserve Act was born out of the experience of men. The principles of that Act were first put into effect, probably by Great Britain, in a panic immediately after the Civil War in 1866, when, by ministerial promise, the Bank of England, which, though owned by private stockholders, to all intents and purposes, is a governmental institution, was permitted to issue legal tender notes, against other securities than gold, in violation of the English Act of 1849 ; but, because of the exigency and need of immediate currency, the ministerial powers gave a permit to use the printing press, and manufacture legal tender notes against commercial bills. It abated the panic within twenty-four hours. Three times that has occurred in England.

The Great German Empire followed that experience, and gave authority by statute law to the Reischbank, to issue legal tender notes against commercial bills, of a certain qualified class, under a penalty of a 5 percent interest charge, payable to the Government, and which would serve as a means for automatic retirement of those notes ; and in that way they got protection against inflation.

The principle of the Federal Reserve Act, which is of great importance to this country, is the fact that commercial bills of a qualified class, can be used by the Federal Reserve Banks as a basis of issuing money to the business men of the United States. In the old days, under our laws, we concentrated the reserves of the banks of the country, first in forty odd reserve cities, then, in three central reserve cities ; then, at last they were pyramided in New York, where the New York banks were compelled to rely upon each other, where those who wanted currency in the country relied upon New York to furnish that currency, and therefore, there was built up in New York the reliance on stocks and bonds, used as collateral for call loans, and these call loans went into the millions; and when any sudden demand came that alarmed the banks of the country, they had no remedy whatever, except to call upon the borrower to make good his call loan. The borrower under such circumstances had no recourse, except to sell his securities upon a falling market.

Under conditions of that kind, we have been visited with a number of severe panics, the recent one being in 1907, and also in 1894 and 1893. These panics have swept this country. They have made the business men in this country tremble for fear, and have prevented tens of thousands, and hundreds of thousands of men from engaging in legitimate manufacturing business, in legitimate commerce, in other avenues, which would be well warranted, if there had been any stability in our financial system, any stability in the credit market.

Under the American system, men are compelled of necessity to extend credit, and do extend credit, and under such conditions where there is no stability in the credit market, it was easy to destroy confidence ; and we have talked learnedly in the past about our troubles being due to loss of confidence, and have sometimes forgotten that the loss of confidence was unavoidable, because the banks of the country owed ten times as much money as the banks had in their vaults, and if 10 percent of their depositors at any one time were to call for the payment of the deposits in cash, the banks would have nothing with which to transact current business, and to pay a check on a deposit.

It was no wonder that the banks of this country were in a state of continual trepidation, whenever there was a threat of a panic, or a disturbance of confidence. I believe for us that period is gone, and gone forever.

Under our present system, commercial bills can be used to issue money, Federal Reserve notes, they are not bank notes either. The banks of this country tried hard to make them bank notes. They are notes of the United States, with the taxing power behind them, and as good money as the world has ever seen, secured in cash by a credit of a man who takes his note to his local bank, and is worthy of a loan ; secured, second, by the member bank that endorses that note; secured, third, by the Federal Reserve Bank that takes that note; secured, in fact, by all of the banks of this country who are members of that system, and secured by the stockholders of those banks, under the double liability clause ; and finally, secured by the taxing power of the people of the United States. There never was in the history of the world a security of more stability and dignity.

But what has that to do with the investment banking business? It gives for the first time in this country, an assured stability in business. It brings into activity every human agency available in our country. It brings to employment every man willing to labor. It brings a condition, not of temporary prosperity, but of continued stable business prosperity in this country, which cannot be broken.

Any individual who indulges in unsound business methods, will of necessity go into a personal liquidation, as he merits ; but, in the future, no man will have the ground cut from under his feet, by a sudden panic, such as swept over this country in October, 1907, when nearly every bank from the Atlantic to the Pacific, closed its doors from Saturday to Monday night. The American people had the wit, even in that exigency to manufacture an artificial currency in the form of clearing house certificates ; in the form of cashiered checks, pay checks; certificates of deposit, and numerous other forms which availed at the time, as a medium of currency; and the people of the country had the good sense to stand by the banks and not to demand the payment of their deposits in cash.

But the exigency will never arise again in this country, and you will find that those who deal in municipal securities will have a widening field, a more stable field I call your attention to the stability of the interest rate, since the Federal Reserve Act went into effect, practically no fluctuation. In a few days the interest rate in New York went to 6 percent. ; but the rate is comparatively stable now, without the fluctuation of a single point, and the reason of that is perfectly plain because those who have a right to ask credit ; those who have a right to demand currency, can offer these proper securities and obtained the currency that they need, and when a man can get currency, and knows he can get currency then he does not want it.

The United States is entering into a new era, and in my judgment the world is entering into a new era. Since the Federal Reserve Act went into effect, the bankers of this country have gained over six thousand millions of dollars in deposits, and that is a sum so gigantic that the human imagination can hardly conceive it. It is a little difficult to ascertain where that line of deposits comes from. A part of it is undoubtedly due to money which was hoarded in this country, and which was gradually put back into employment under conditions that the holders of it believed they were safe in marching forth on. A part of it is due to drawing out of stockings of the cowardly depositor who was unwilling to trust the bank, some ninety odd millions of dollars through the postal savings system by which the Government puts itself behind the depositors and redeposits that fund with the bank. A part of it is due to the bringing into this country of European gold ; but a very large part of it, in my opinion, is due to the extension of credit by the bankers of this country, which re-appear as deposits. So that in my judgment the Federal Reserve Act has a very far-reaching effect upon all business.