- BANKING REFORM IN THE UNITED STATES 1. Defects of the national banking system.—The advantages and defects of the national banking sys tem have already been pointed out. It may be well to summarize the defects briefly. There are four im portant criticisms, as follows: (1) the note circula t ion was inelastic; (2) there was no central reserve and no central control of the system; (3) the assets of the banks were not liquid, because of the lack of a system of rediscounts and acceptances; (4) the Federal treasury was unduly burdened with the redemption of credit money. There were other de fects but they were due primarily to these four.
For twenty years bankers and economists worked for needed reforms in our banking and currency sys tem. Their efforts resulted in the Federal Reserve Act of 1913, which is considered by many as the most important piece of Federal legislation since the Civil War. A survey of the various movements for re form will help to explain the provisions of the pres ent law, for it will show what was in the minds of the people who were responsible for the passage of the Act.
2. Baltimore barkers' convention.—The need for a currency system, more adaptable to commercial needs and more capable of expansion and contraction, was felt soon after the close of the Civil War. The re construction of the South and the rapid development of the West made demands upon the national bank ing system which could not be met. Many think that the demand for silver legislation would never have been so pronounced if the bank circulation had been adequate for the requirements of business. The Democratic platform of 1892 contained a plank rec ommending the repeal of the ten per cent tax on state bank issue. The recommendation was not accepted by Congress. President Cleveland mentioned the need for reform but refrained from making any spe cific proposal.
In 1894, a convention of bankers at Baltimore took up the question. Their plan was strikingly similar to the Canadian system. They proposed to drop the bond deposit idea. Notes were to be issued against general assets, as in Canada. The proposed limit
was 50 per cent of the paid-up capital, instead of the Canadian limit of 100 per cent. The notes were to be secured further by a guarantee fund deposited with the United States Treasury. This guarantee fund was to be built up to five per cent of the outstanding circulation by gradual payments from the banks, and the notes were to be a prior lien on the assets of any bank that failed. An emergency circulation to the amount of 25 per cent of the capital was recommended, instead of 15 per cent of capital and surplus, which is the Canadian limit. This emer gency circulation was to be taxed heavily so as to in sure speedy redemption as soon as the need for the circulation should pass.
3. Proposals of Secretary Cleveland strongly urged the need for currency re form in his next message to Congress. Detailed pro posals were made by John G. Carlisle, Secretary of the Treasury. They may be summarized as follows: 1. Repeal the bond deposit requirement.
2. Permit national banks to issue notes up to 75 per cent of their paid-up capital, to be secured by their general as sets and a guarantee fund deposited with the Treasury, con sisting of United States legal tender notes to the amount bf 35 per cent of the notes outstanding.
3. Make notes a first lien upon assets of a failed bank.
4. Provide a safety fund by taxing the banks, the fund to be invested in United States bonds and applied to the immediate redemption of notes of a failed bank.
5. Limit the retirement of greenbacks to an amount not in excess of 70 per cent of new circulation issued by the banks.
6. Suspend the 10 per cent tax on state bank note issue in the case of state banks which could comply with sections two and three above.
Secretary Carlisle's plan suggests the Canadian system. It would have been an improvement. The 54th Congress was hostile to President Cleveland and would not enact any reform which might have appeared as an administration measure. In 1896 all ordinary plans for banking reform were submerged in the silver controversy.