Because of hostility in certain quarters to the idea of a central bank, an alternative plan was pro posed. This plan was too complicated to allow of an adequate description here. The principal feature was that a bank might issue some of its notes against bond deposits, but that it might also issue others against its general assets. The latter class of note was to bear a heavier tax than the former, and the tax was to be raised as the amount of issue increased. The total issue was not to exceed the bank's capital. The notes were to be secured by a.guarantee fund created from taxes on circulation.
8. American Bankers' Association before the New York Chamber of Commerce report was adopted, the American Bankers' Association met in St. Louis and appointed a committee to draw up a currency measure. This committee recommended a plan which was not essentially different from that proposed by the Chamber of Commerce Committee. A bill embodying the plan was introduced in Con gress but it failed to get consideration before ad journment on March 4, 1907. Before the Congress met again the financial system of the nation was shaken to its very roots by the panic of 1907.
The panic painted the defects of the banking sys tem in such a vivid light that people all over the coun try arose and demanded reform of some kind. Few knew just what was needed. Party leaders thought that public opinion was not ripe for the establish ment of a central bank. A bill for temporary relief was passed by the Senate and another of an entirely different character was reported favorably in the House. The House refused to consider the Senate bill.
A new bill was introduced in the House by Repre sentative Vreeland, providing for the appointment of a National Monetary Commission to conduct an in vestigation and recommend legislation. The bill be came law. It was realized that some time must pass before the Commission could complete its recom mendations and report its findings. Accordingly, the Act, known as the Aldrich-Vreeland Act, provided for the issue of emergency circulation during a lim ited period, which was supposed to be sufficient for the Commission to finish its work.
9. Aldrich-Vreeland Act.—The Aldrich-Vreeland Act, which became law on May 30, 1908, was to ex pire by limitation on June 30, 1914. The following are the most important provisons of the Act: (1) National banks in any locality having unimpaired capital and a surplus of 20 per cent, with aggregate capital and surplus of at least, $5,000,000 might form a currency association. The banks were required to be not less than ten in number. The currency association was to elect offi
cers and to incorporate under the Federal government.
(2) Any member, having outstanding circulation secured by United States bonds to an amount not less than 40 per cent of its capital, could apply to the association for emergency circulation, offering as collateral any securities, including commercial paper, which it might have in its pos session. Emergency circulation was not to exceed in amount 75 per cent of the market value of the collateral deposited. All banks in the association were to be jointly and severally liable for notes so issued.
(3) Any national bank qualified to become a member of an association might also apply directly to the Comptroller of the Currency for emergency notes. The collateral for these notes to be received from the Comptroller might con sist not only of United States bonds but also of other interest bearing obligations of any state of the United States, or any legally authorized bonds of any city, town, county, munici pality or district of the United States. Notes issued in this way were not to exceed in amount 90 per cent of the market value of the securities deposited.
(4) The total circulation of any bank, regular b6nd secured and emergency notes, was not to exceed its paid-up capital and surplus. The total emergency circulation of all banks was not to exceed $500,000,000.
(5) Emergency notes were subject to a tax of 5 per cent per annum for the first month and afterwards to an additional tax of 1 per cent for each month until a tax of 10 per cent was reached, which rate was to continue as long as they remained outstanding.
(6) A redemption fund of 10 per cent was to be main tained with the Federal treasury against all emergency notes, that is, 5 per cent more than that, required against ordi nary national bank notes. The treasury assumed responsi bility for redeeming the notes of all failed banks.
The Aldrich-Vreeland Act did two things. It permitted the Comptroller to issue notes to national banks upon the deposit of security other than United States bonds. It permitted him to issue notes to them thru the currency associations upon the de posit of commercial paper as well as of bonds. The latter plan is almost identical with that which the banks had been accustomed to follow, in the issue of clearing house loan certificates. It will be recalled that while most of the clearing house certificates were payable only among banks in settlement of clearing house balances, some of them were intended for gen eral circulation and actually did circulate among the people.