Such a national system must be supported by every banking unit; by every individual bank carrying its part of the commercial burden, and providing its proper share of the insurance of commercial safety by contributing its proper proportion of the necessary reserves, both local and national.
Mr. Merchant: Mr. Banker, I heartily approve of every word that you have said, and there can be no possible doubt about the result of a discussion of this phase of this question by the American people.
There is one question, however, that I desire to ask you before we pass on, as we may overlook it. Is it not true that our National Banks are now carrying 20 per cent reserves of which 17 per cent are cash? Are not these reserves large enough to meet all emergencies?
Mr. Banker: I presume you gentlemen all know just how the National Banks carry their reserves; but fearing that you do not, I will explain the system to you. All so-called country banks are required to carry 15 per cent reserves; that is $15,000 cash against every $100,000 of deposits; that they may send 9 per cent or $9,000 for every $100,000 of deposits away to what we call reserve cities. Now, there are 320 banks in 48 of these reserve cities. These reserve cities are required by lawto carry a reserve of 25 per cent, or $25,000, for every $100,000 deposits; but they may send away 12½ per cent, or $12,500, for every $100,000 of deposits to a central reserve city, of which there are three: New York, Chicago and St. Louis.
These central reserve cities must carry 25 per cent cash reserves or $25,000 in cash for each $100,000 of deposits. Experience shows that these 320 banks in the 48 reserve cities and these 55 banks in the three central reserve cities keep all of their money loaned out all of the time; that is, right up to the reserve limit. Since they have no margin, when called upon for anything more than the usual daily current requirements, something extraordinary must be done to meet the demand. Loans must be called in and paid off. But since these same banks that are calling loans are supposed to be carrying the real, the final, the ultimate reserves, a deadlock follows, and the borrower is up against it; rates go almost anywhere that the banks want to put them; from 1 per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 per cent; I believe that's the record rate. In other words, we have no true, final reserves in this country at all, for you cannot break the Government limit fixed by statute, and therefore we have a complete lockup all along the line, until through straining, something breaks somewhere.
There is absolutely no use of sending a part of your reserves away, if you cannot get them when you want them; for then it is no reserve at all, and that is the actual position or situation in the United States today. Our so-called central reserves are not reserves; it may be written down as a purely fictitious scheme, for there cannot be found a single year in which any substantial arrangement has ever been made by running the reserves up in the central reserve cities until they amounted to an average of 35 or 40 per cent, which would be the only practical way of providing for the crop-moving period.
If there is one thing more barbarous in our bankingpractices than a bond-secured currency, it is our system of superimposed bank reserves, especially in connection with the fixed limit, established by the Government. What would you think of a railroad company which ran out through the wheat country, having one-quarter of all its freight cars idle all the time as a reserve, and yet when thrashing time came, refused to use them, although the wheat was rotting on the ground, because the management of the road demanded that the railroads should always have at least one-quarter of the cars idle, as a reserve to meet the demands during the crop-moving period. Wouldn't you think that that was idiotic?
Mr. Laboringman: Well, I should say so.
Mr. Lawyer: Mr. Banker, there is another point in that connection, and that's this. You started off to get a central reserve, a true reserve, as I supposed, as distinguished from the reserves of the National Banks that are all loaned out all the time. Then, your reserves were all broken up in the end, first into three hundred and twenty banks, and at the end into fifty-five banks, located in New York, Chicago and St. Louis. What we must have, it seems to me, is a real central reserve in the form of unloaned gold, and then permit the banks to use their cash reserves, if by any chance they needed them in part at least.
I notice that you carry about $100,000 in accordance with the legal requirement. Now, just as you said a while ago, there are times of the year when you could easily carry $200,000; but again there are times when you want to use a part of the $100,000, possibly as much as $75,000 of it. Why should you not do it, and then accumulate the necessary excess in the slack time to make up your average for the year.
Mr. Banker: That is precisely what we ought to be permitted to do.
Mr. Lawyer: Then, Mr. Banker, instead of sending as you now do, 9 per cent of your deposits, or $175,000, to a reserve city, and that city in turn sending a part of it tosome central reserve city, your balance with your reserve city should be sufficient to carry your exchange account, and the balance go to a great central gold reserve, upon which you and your fellow bankers throughout the country could rely absolutely when the emergency came.
Mr. Manufacturer: I have been listening to you gentlemen with intense interest, and must say that you have worked this plan out completely and practically.
I see what an enormous advantage it would be to a bank to use its reserve as a reserve should be used, and what an absolute guarantee of protection it would be to have all the reserves of all the banks centralized, and ready to help anyone of them in need of gold, because the gold was actually on hand, and had not been loaned out as the banks now do; but I have been wondering where the State Banks and Trust Companies were going to get 10 per cent more reserves of their demand deposits to put up in this central gold reserve. You must remember that they have five billion of deposits.
Mr. Banker: I can tell you how to do that; that is very easy.
When the State Banks come into the National system as they certainly will, if you have the right kind of a system, they will exchange their notes for the gold or gold certificates that are now in circulation, as they come in over their counters. You see that all the gold and gold certificates that are now held by the banks only amount to $879,000,000, although there is in the country $1,850,000,000 of gold, practically one billion of gold, or $10 of gold for every man, woman and child out in the corn, cotton and wheat fields; in the mining camps, when as a matter of fact, this gold should be in the reserves of our banks, protecting our bank credits; and bank notes should be in the corn, cotton and wheat fields, in the mining camps filling the true function of currency, and where gold, or gold certificates are not at all needed.
Mr. Lawyer: Now, wait a moment, Mr. Banker, andlet me see if I grasp that. It is very important that we should all understand this. I am exceedingly anxious to, and it strikes me that we are at a mighty interesting juncture of this subject. If a State Bank with a reserve of $70,000 came into your National system and had to increase its present reserve, which is only 7 per cent, by as much as 10 per cent, it could do so by simply retaining the gold and gold certificates as they were deposited from day to day, and pay out its bank notes to the extent of one hundred thousand dollars. The result would be that the bank would increase its liabilities by $100,000, but it would also increase its reserves by $100,000. That is certainly a perfectly sound proposition. Before the bank came into the system, its reserves were only 7 per cent, or $70,000, since its deposits were $1,000,000. After it goes into the National system, it has changed $100,000 of its notes for $100,000 of gold, or gold certificates, as they came in over the counter; it now owes $1,100,000, of which $100,000 is of notes, but it now has $187,000 of reserves of all of its demand liabilities, or 17 per cent, instead of $70,000, or 7 per cent, as before.
Mr. Merchant: Isn't that a simple and very easy thing to do? And what tremendous strength it would give to the whole banking situation immediately.
Mr. Manufacturer: Then when you think of it, what a stupendous piece of folly it is, to have all this gold floating around the country, doing no possible good, when a piece of credit paper, or bank note, would do the work just as well.
Mr. Laboringman: Anybody can see that. A man that can't ought to be arrested for want of brains. He'd have to plead guilty. Putting that gold that you need in your bank reserves at the rate of one dollar of gold for five or six dollars of credit into the streets, cotton fields, corn fields and in the mines, is no greater piece of folly than it would be to send a six-horse team to haul Mr. Farmer home, when one horse would do just as well.
Uncle Sam: Mr. Laboringman has got this thing deadright. In fact, in my judgment, he has the horse sense of this crowd. Give him a show, I'll bet on him every time, he always takes a short cut, and hits the nail square on the head.
Mr. Merchant: Suppose, Mr. Banker, that all the banks of the country should come into the National system, and put up, say 10 per cent, as you suggested a while ago, of their demand or individual deposits, and 5 per cent of their savings deposits, what would your central gold reserve amount to?
Mr. Banker: On June 14, 1912, the Comptroller of the Currency reported that the individual deposits amounted to ten billion five hundred million ($10,500,000,000), and that the savings deposits, outside of the mutual savings bank, amounted to two billion eight hundred and seventy-two million ($2,872,000,000).
If the State Banks and Trust Companies should become National Banks, and bring their reserves up to the National standard, by exchanging their notes for gold; that is, exchanging $468,000,000 of their notes for that much gold, the result would be as follows:
This is just double what the gold reserve of France is, the largest gold reserve in the world today, but when you consider the fact that our banking resources are 45 per cent of the total banking resources of the world, it should be even more than that. It is interesting to note that in making this readjustment for a central gold reserve it would be just $100,000,000 larger than our bank note circulation.
With this central reserve of gold created, the United States could then control the inflow and outflow of gold to and from the United States, precisely as England controls the movements of gold today by fixing the rate of discount or a price for the use of gold.
Uncle Sam: Well, boys, if there is one phase of this question that you have treated with a greater thoroughness and more satisfactory results than any other, to my mind, it is your plan for protecting our bank credits with ample gold reserves. They are so disposed of as to keep at all times all bank credits in touch with gold, and therefore as good as gold; at the same time have developed a great central gold reserve in harmony with the practice of the great commercial nations of the world, and commensurate with my importance as a banking power in the world. You have made this subject so clear and conclusive that I need not restate the points you have made.
I hope our next night will be as satisfactory as this has been.
Good Night.
ELEVENTH NIGHT
THE BANK
Uncle Sam: At our last meeting you considered the very important element in banking, of reserves, and seemingly the final factor that enters into the structure of a bank. You have run the whole schedule off, I think. Standard of value, money, currency, exchange, capital, credit, government credit as money and as currency, land credit as money and as currency and reserves. What else can there be?
Mr. Banker: I do not think there is any particular topic for us to tackle now, but the bank itself, and I want to be permitted in the outset to describe just what a bank is, and what it does. I do not think there is any single thing in business life that is so misunderstood. People think of a bank as a kind of mystery.
The banker is a merchant in money and credit, and precisely as you can say that a man is a hardware merchant, cotton goods merchant, grain and flour merchant, so you can say that the banker is a money and credit merchant. He deals in these two things.
Let me illustrate this in a simple way. If Mr. Farmer should come to me to borrow a thousand dollars for three months, and I should make him the loan, as we say, I, as a banker, would buy his note, due in three months. That is just what happens every time a bank makes a loan; it simply buys the note. Now, in all probability I would not give Mr. Farmer any actual money, but would simply give him credit for one thousand dollars on the books of the bank, so that he could draw his check against it. In other words, I would owe him one thousand dollars. I have created a debt to him of one thousand dollars; in short, I have traded debts with him. He has given me his note, which is a debt for one thousand dollars duein three months, and I have given him credit on the books of the bank, a debt due to him on demand. The transaction does not differ in the slightest degree from the trade of horses for cattle. Let me demonstrate this. Suppose that Mr. Farmer came to me and offered me two of his Jersey cows for my horse and buggy, because he does not want the cows, but does want the horse and buggy to do a lot of running around. I want the cows to milk, and so make the exchange with him. He gets something that meets his pressing needs in the horse and buggy, and I get something from which I receive an income, the cows from which I get milk. This corresponds to the interest on his note, and by the way, the cream would be my profit.
Mr. Laboringman: That's it; you bankers are always milking the public, and the interest you get is all cream; all profit.
Mr. Banker: Oh, no! it is not as bad as that. Don't make such a mistake. The average cost to the bankers of the country, outside of any losses, is about 4 per cent upon their deposits for interest paid on deposits, rent for building, clerk hire and other general expenses. So you see that it is not all profit by any means.
But let me get right back to what I was saying. The banker is nothing but a trader who keeps an open shop for the purpose of trading his debts for the debts of his depositors; or to put it in another way, for the purpose of exchanging his credit for actual money which is deposited with him, or for checks and drafts that are deposited with him, or for promissory notes which he buys when he loans money to his customers, and gives them credit on his books for the amount of the loans. All these different things, money, checks, drafts and promissory notes are bought by the banker with his credit, and the greater the amount he buys with his credit the greater will be his debt. But, you will probably saythese are his deposits. Very true, but his deposits are his debts. Don't forget that.
Mr. Lawyer: Mr. Banker, you have accurately described the situation, just as it exists today, and that, of course, is what we are interested in; but it seems to me as though it would be a great help to us to follow the development of banking, as we have it now.
MacLeod, the highest authority upon banking credit, and the theory of banking, used this language: "The first business of a banker is not to lend money to others, but to collect money from others."
Bagehot used this language, in describing the business of the bank: "Thus, a banker's business—his proper business—does not begin while he is using his own money; it commences when he begins to use the capital of others."
Many writers have maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and that its sole function should be to exchange its credit for coin, and coin for credit; and that the quantity of the bank's credit should always be exactly the same as the coin it displaces. This principle is called the currency principle.
Many banks in the world's history have been constructed on this principle, especially those famous banks at Venice, Hamburg, Amsterdam and several others.
These cities, small in themselves, were the centers of great foreign commerce; and as a natural consequence, an immense quantity of coin and denominations of all sorts of different countries was brought by the foreigner who resorted to them. These coins were, moreover, greatly clipped, worn and diminished. The degraded state of the current coin produced intolerable inconvenience, disorder and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bag full of all sorts of different coins. The settlement of these bills, therefore, involved perpetual dispute—which coins were to be received, and which were not, and how much each was to count for. In order to remedy this, it finally became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. In order to do this, the magistrates of those cities instituted a Bank of Deposit, in which every merchant placed all his coins of different kinds and nations. These were all weighed, and the bank gave him credit, either in the form of notes, or a credit on their books, exactly corresponding to the real amount of the bullion deposited. The owner of this credit was entitled to have it paid in full weighted coin on demand. These capital credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these Bank Credits, which were calledBank Money. The consequence was evident, as this Bank Credit, or Bank Money, was always exchangeable for money of full weight on demand; it was always at a premium.
These banks professed to keep all the coin and bullion deposited with them in their vaults. They made no use of it in the way of business, as by discounting bills. Thus the credit created was exactly equal to the specie deposited and their sole function was to exchange specie for credit and credit for specie.
These banks were examples of the currency principle; they were of no further use to commerce than this, that they served as a safe place to keep money in—and they insured a uniform standard of payment for debts. They made no profit by their business, but those who kept their accounts with them paid certain fees to defray the expenses of the establishment.
Later and during the civil war in Great Britain the goldsmiths of London began to receive the cash of the merchants on deposit. They not only agreed to repay it on demand, but to pay 6 per cent per annum for the use of it. Consequently, in order to enable them to do that,the deposits necessarily became their property to trade with as they thought best.
When, therefore, these goldsmiths received this money on deposit, they gave in exchange for it, or issued to their customers a credit, or right to demand back an equal amount of money at will. And it must be noted that it is this banker's credit which in banking language is termed a deposit. The money itself is called an asset, or resource.
MacLeod says that in practice it will be found that in ordinary times a banker's balance in cash will seldom differ by more than one thirty-sixth part from day to day. So that if he retains one-tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times.
The banker, therefore, can see that if an amount of cash was sufficient to support ten times the amount of his liabilities, he might safely buy debts to several times the amount of cash in his hands.
From this you see clearly by evolution a banker is a trader, just as Mr. Banker said a few moments ago, whose business consists in buying money and debts by creating other debts. If he has taken actual money on deposit, he has bought it, and if he has received checks and drafts on deposit, he has bought them likewise with his credit.
Thus, it is seen that the essential and distinctive feature of a bank and a banker is to issue credit payable on demand, and that this credit may be put into circulation and serve as money.
First: They might demand payment in cash; if they did so, the banker canceled his debt.
Second: The banker, if his customer wished it, gave him his promissory note to pay him or the bearer on demand such sum as he might wish; this neither created nor extinguished a deposit, it merely recorded it on paper for the convenience of transferring it to someoneelse. This promise to pay was at first called a "Goldsmith's Note," and is now called "A Bank Note."
Third: If the customer wished to make a payment he might write a note to his banker desiring him to pay the money to some particular person, or to his order, or to bearer. These notes were then called "Cash Notes," but are now called "Checks."
Now, it is perfectly clear that neither a bank note, nor a check creates any new right; it merely records on paper a right to have money which already exists, and it is used for the purpose of transferring that right to have money to someone else.
It will be noted now, and I want you to keep this observation clearly in mind, that all banks are banks of issue, that is issues of credit. MacLeod says that the very meaning of the words "To Bank" is to issue a right of action or a credit, in exchange for money or other debts; and when once the banker has issued this right of action, or right to have money, to his customer by writing it down to his credit, it makes not the slightest difference as to his liability whether he delivers his own promissory note, that is a bank note, to his customer, or whether he merely creates the credit, and gives him the right to transfer it to someone else by means of a check.
When a person deposits money at the bank, it is not his intention to deprive himself of the use of it; on the contrary, he means to have as free use of it as if it were in his own purse. The depositor, therefore, lends his money to his banker, but yet at the same time has the free use of it, as the bank employs that same money in promoting trade; upon the strength of the money being deposited with the bank, it buys debts with its promises to pay, either in the form of "Bank Notes," or of credit on its books, several times exceeding the amount of the cash placed with it; and the depositors who sell the bank their debts, have the free use of the very same coin which the depositor has the right to demand; thus the lender that is, the depositor, and the borrower that is, the banker,have the same right at the same time to the free use of the same money. All banking depends on the calculation that only a certain small portion of each set of depositors will demand the actual cash, but that the majority will be satisfied with the mere promise, the "Bank Notes" or the credit on the books of the bank.
Banking is a species of insurance; it is theoretically possible that a banker may be called upon to pay all his deposits at once, just as it is theoretically possible that all the lives insured in an office may end at the same instant; or it is theoretically possible that all the houses insured may be burned at the same hour. The depositors and noteholders of the Bank of England could demand payment the same day. All the depositors and noteholders of the Bank of France could demand payment the same day. All the depositors of any bank could demand payment the same day. But all banking, as well as all insurance, is based upon the expectation that these contingencies will not happen, and the average experience of life proves that they do not happen. A banker multiplies his debts to be paid on demand and keeps buying a sufficient amount of cash to insure the immediate payment of all claims which arelikelyto be demanded at one time. If a pressure comes upon him he must sell some of the securities he has bought, or borrow money on them.
When the customer discounts a note at his bank he parts with the property in it, just as when he sells any other article. The note becomes the absolute property of the banker and he may sell it again, or pledge it, or deal with it in any way that suits his own interests best.
The notes in the safe of a banker are exactly similar to the goods in the shop of a retail dealer. The retail dealer buys the goods from the wholesale dealer and sells them at a higher price to his customers; and, as he makes a profit by doing so, the goods arecapitalto him. Notes likewise are goods, or merchandise, which the bank buys from its own depositors at a discount, or bearing interest for a time, and as the bank makes a profit by so doing, the notes arecapitalto the bank precisely in the same way that the goods in the shop of the retail dealer arecapital.
Now, lest we shall be misled, I want to call your attention to an error which is very common. Many persons not being aware that the word "Deposit" in banking language means the credit created in exchange for money, checks, drafts or notes bought, when they hear or read that a bank has such an amount of deposits conceive or suppose that the bank has that amount of cash on hand to trade with.
When it is said that a bank has $10,000,000, $50,000,000 or $100,000,000 or $200,000,000 of deposits, they are not deposits in cash at all; they are almost entirely pure credit, and are exactly equivalent to just as many "Bank Notes." They are nothing but an enormous superstructure ofCreditbuilt up on a comparatively small basis of reserves exactly like the note circulation. These figures do not show the quantity of cash at the command of the bank that can be traded with; but they show the quantity of business the bank has done, and the debts or liabilities it has created. These deposits, then, which so many think are cash, are in fact nothing but the credits the banks have created in exchange for the cash and notes which figure on the other side of the balance sheet as assets or resources.
This play of bank credit has been graphically described by Joseph T. Talbot, the Vice-President of one of our largest National Banks; he says: "A customer holding a bank note may present it for deposit and credit, instead of demanding redemption in cash. In this case, there is a conversion from the circulating form of credit, payable to bearer, back to a 'Book Credit,' payable to order, as was ordinarily the case. Thus it will be seen that all these forms of 'Bank Credits' are interchangeable, one for another, at the pleasure of the holder of the credit. The difference between theseseveral forms of credit involves no changes whatever in the bank's liabilities. They amount to about the same difference which exists, let us say, between a coupon bond and a registered bond. The one is payable to bearer, the other is not. At one time a bank note may best serve a customer's needs; at another time he might prefer a deposit in the bank; or again he might prefer 'exchange.' All these interchangeable uses of credit actually and continuously take place. It will now be clear that a circulating 'Bank Note' in the hands of the public does not differ essentially from a 'Deposit Credit' on the bank's books.
"If one of your local bankers were asked how much he allowed his bank to issue in cashier's checks, he would tell you that he issued whatever sums his customers wanted; either against their balances, or against new loans. He would tell you the same in respect of the amount of exchange he issued; his sole rule and guide being the amount of such credit which his customers require, and which he is in position to lend afresh, and to maintain against, or to redeem in cash, if demanded. If asked how long these obligations were allowed to remain outstanding, he would tell you that he had no control whatever over the period of their circulation; that these obligations stood out just as long as the holders wanted to use them in that form, and no longer; that his only concern was in being prepared to redeem the obligations on demand in cash.
"Thus it is that the volume of bank credits, whether in the form of deposits, checks or notes, responds in a rise or fall according as there is legitimate trade demand; and over this the bank has no control, except by ceasing to make loans. This is why deposits increase as loans increase, and these increase as the volume of business increases."
Now, if we understand the real nature of these so-called deposits, the reason for their diminution is plain. Deposits fall because loaning stops. When you stoploaning, you stop creating credit. You can readily see that it is not a diminution of deposits in cash, but it is a contraction of credit, a refusal to make loans.
This erroneous notion of the real meaning and nature of deposits in banking language may lead to very great mistakes in estimating the stability of a bank. That a bank's stability depends on a due proportion being kept between the deposits or the liabilities and the cash; and it may very well happen that while the deposits are apparently mounting high, and might lead many persons to believe that the actual quantity of cash was increased, it might be nothing, perhaps, but a dangerous extension of credit. And if this were carried too far, the bank might be in the most dangerous position just when it was apparently most flourishing.
Now, let us consider how a banker who has purchased either money or notes from his customers by creating deposits or debts, may be used by his depositors. That is how the depositors may use these credits. Of course, every banker does business exactly in the same way, or practically so, and when their customers begin to use checks these different results may follow:
First: The actual money may be drawn out.
Second: The credit may be transferred to the account of another depositor of the same bank.
Third: The check may be an order to pay another bank. But in this case, if the first bank is ordered to pay the second bank so much, the chances are that the second bank will be ordered to pay the first bank practically the same amount. If the claims of the two banks on each other were exactly equal, the respective checks or orders are interchanged, and the credits readjusted to the different customers' accounts accordingly, without any payment in money. If it should happen that the claims of all the banks against each other exactly balanced, any amount of business might be carried on, without requiring a single dollar of gold coin. If the mutual claims of the different banks against each otherdo not exactly balance, it is only necessary to pay the differences in coin.
Now, exactly to the degree that banks are brought into a closer relationship with each other by such means, the smaller is the quantity of coin required to carry on the business of the country; or the more gigantic is the superstructure of credit which can be reared upon a given reserve.
From what I have already said, you must all see that a merchant deals with credit; but a banker is a dealer in credit. A merchant brings his notes or debts, that are payable some time in the future, to the banker for sale, and the banker buys them for credits in the form of deposits, or debts payable instantly, which have precisely the same effect in commerce as so much gold. He reaps exactly the same profit by creating a credit in favor of his depositor as if he gave him the actual cash. The checks drawn against these credits so created by the banker circulate commodities in trade precisely in the same way that bank notes do which circulate commodities precisely in the same way that gold coin does. Consequently, these bank credits so created by the banker, whether upon his books subject to check, or in the form of bank notes, are exactly equal in their practical effects, so far as exchanging commodities is concerned, to the creation of so much gold coin.
This being true, you must realize how absolutely essential it is that every bank credit must be kept as good as gold by current redemption in gold everywhere, whenever demanded.
Mr. Banker: Mr. Lawyer, in all that you have said you have only affirmed what I said in the outset; the banker is a shopkeeper, a trader exchanging his credit for money and debts.
The development of the banking business in the United States is most interesting, and its growth has been simply marvelous.
On Feb. 25, 1863, almost fifty years ago, when theNational Banking System was inaugurated, there were in the eastern states, including New York, New Jersey and Pennsylvania, what are known as Mutual Savings Banks. These institutions are run solely for the benefit of the depositors. This is upon the theory that those using savings banks are the wards of the state. These Mutual Savings Banks have no capital and the trustees, or directors, serve without pay. There are today in the United States 650 of these Mutual Savings Banks, with deposits amounting to $3,608,000,000. Practically all of these Mutual Savings Banks are located in the east, there being only thirty-one west of Buffalo. These few got a start before the present conditions of banking grew up. Today it is quite impossible to start a Mutual Savings Bank anywhere, because the State Banks and Trust Companies are able to pay such high rates of interest, owing to the fact that they can conduct the Savings Bank business as a part of their regular commercial business, or as a part of their Trust Company business. That is, the Savings Bank business is incidental to their regular business, and requires no separate and special organization. If there are any extra charges they would be nominal at most. The savings business being conducted over the same counter, this particular branch of banking may be regarded as done at no cost to them. Under the circumstances it is very easy to see how the State Banks, and those banking institutions more recently organized, known as Trust Companies, have absorbed all the savings business where the Mutual Banks had not already been permanently established.
Another reason that has enabled them to do this is the fact that in most states there are no prescribed rules for the investment of savings bank deposits, and the banks are using the savings deposits for commercial purposes, and also in speculative ventures, particularly in the way of underwritings where the profits are much larger than could be realized from such funds if they were limited to investments of the highest order where,as you know, the rates of interest are comparatively much lower.
Mr. Merchant: How many such institutions are there?
Mr. Banker: There are today thirteen thousand three hundred and eighty-one State banks, with four hundred and fifty-nine million of capital and two billion nine hundred million of deposits.
Side by side with these state banks are 1,292 State Savings Banks, with seventy-seven millions of capital and eight hundred and forty-three millions of deposits. These State Savings banks differ only in name from the regular State banks. The only point to be noted in this connection is that the local statutes, or the laws of the State where the bank is located, always determine whether the name will be a State Savings bank, or a State bank. It may be assumed that whatever the name, the business carried on is practically the same all over the United States, with here and there some slight difference, but no substantial variance.
Mr. Manufacturer: These institutions you have named do not include the Trust Companies, do they? There seems to be a perfect craze to start Trust Companies now. Why is that?
Mr. Banker: Within the past twenty-five years there has grown up, almost as if by magic, the class of banks you have just mentioned, differing from State banks and State Savings banks only in one single respect, but that is an all-comprehending one. Enterprising men in almost every state have secured the passage of laws for what they call a Trust Company business. Generally speaking, what you cannot do under a Trust Company Charter is some kind of a business that has not yet been thought of.
There are 1,410 of such Trust Companies, so called, with capital amounting to $419,000,000 owing individual deposits amounting to $3,674,000,000 with $450,000,000 additional liabilities, or something over four billion dollars, all told.
This vast business has grown up outside of the National banking system, simply because the National bank could not, but these other institutions could develop along natural lines of business progress.
Notwithstanding these obstacles, however, there is no kind of a banking business that the National banks of the country are not doing in some way or other. Of course, they are not all of them doing all kinds of business, but they have worked out methods by which they can, if they desire to do so. Of the 7,397 National Banks, nearly half of them, 3,039, are now doing a regular savings bank business, without any express authority of law, and 2,340,226 depositors have deposited with our National banks $659,500,000.
Who is there who does not know that either downstairs in the same building, or upstairs in the same building, or around the corner in some other building, with the back ends of the two buildings adjoining, many, if not all, the National Banks have attachments, where they are carrying on the Savings bank business and the Trust Company business under state charters. National banks are under National supervision, while the State banks and Trust Companies, owned and manipulated by them, are under State supervision, or possibly under no supervision at all.
There are many National banks holding the stock of other banks, either Savings banks, State banks, or Trust Companies in their treasury, and some of them are holding the stock of two or more banks. Only recently it was discovered that a National bank had invested ten million dollars, directly or indirectly, in other banks throughout the country; possibly an examination would show that this ten million was partly the stock of other National banks, and partly the stock of state bank institutions such as Savings banks, State banks and Trust Companies.
Now, if there is one holding company more to be criticised, and more to be abjured than any other, it is a bank holding company, controlling the stock of a greatmany other banks, particularly so under different supervision.
When we behold the malformation of banking as now carried on in this country, due to the struggle of the various institutions to adjust themselves to these new conditions and to take advantage of all the opportunities in modern business, it reminds one of the crooked, twisted, knotted, and sadly misshapen tree-trunk that has grown up amidst and between huge rocks, that stand in the way of an upright and symmetrical development. These huge bowlders and rocks are the obsolete laws on our statute books, our ignorance, our selfishness, our prejudice, our political cowardice and our demagoguery.
Like our mutual savings banks, the original idea was that a Trust Company could only do a Trust business in the strict sense of that word. They could hold a railroad mortgage, and pay interest to the bondholders, perform similar functions for other corporations, and could act as a trustee in case of estates. Today you may assume that no kind of business will escape the scope of the charter of the so-called trust company, from the care of estates and the execution of corporate trusts to banking in all of its forms, and agencies of every conceivable kind. In other words, the all-round charter of the American Trust Company, popularly so called, permits it to do anything that the varied affairs of the American citizen may by any chance require.
Just as there are in the east mutual savings banks, which are relics of former days, so the Trust Companies, with their limited powers, are only a landmark in the evolution of American banking, and must disappear as a separate institution in time.
The growth and development in fifty years has produced in the United States a banking unit, doing in a conglomerate way what it ought to be doing as a departmental business, with four distinct functions: viz., a commercial business, the manufacturing of credit; a savings bank business, accumulating the savings of the laboringmasses, which is a sacred trust fund that should be placed in high grade investments; a trust company business, executing trusts, and carrying on agencies of every kind; a note-issuing business, which is only another form of the commercial business, as the bank note is in fact only another form, as we have learned, of a deposit—a circulating credit in place of a check credit for the convenience of the people.
From Feb. 1, 1863, the birth of the National Bank Act, down to the present time there has not been one single change in the National Bank law worth mentioning. It is true we have dotted an "i" here, and crossed a "t" there; but as for a substantial change there has not been a single one made. Now, this is truly a most marvelous fact, when you consider how great have been the changes, especially since 1890, or during the past twenty-two years. Our banking resources have increased fourfold. In 1890 they were about six billion, today they are more than twenty-five billion.
Mr. Lawyer: This growth in our banking power is not so strange because it only reflects the growth of our business. The clearings of the United States in 1890 were only thirty-seven billion, while the clearings this year must pass the hundred and seventy billion dollar mark. The productions of the United States in 1890 were only seventeen billion. The productions of the United States in 1912 will exceed thirty-five billion dollars. The wealth of the United States in 1890 was only sixty-five billion dollars. The wealth of the United States in 1912 is estimated at about one hundred and twenty-five billion dollars. The imports in 1890 were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in 1890 were eight hundred and forty-five million; this year our exports will exceed two billion three hundred million dollars.
Mr. Farmer: And do you mean to say with this vast, almost incalculable increase of production and wealth and consequent increase of banking resources, there hasnot been a single step taken by the National Government to facilitate it?
Mr. Banker: Mr. Farmer, there has not been a single change made to facilitate the handling of this vast business. On the other hand, there seems to have been such a profound ignorance on the part of Congress, or such an abject fear, lest they might aid business, that every progressive movement of a legislative character has been left to the states, which have given us laws as varied as Jacob's coat of many colors; indeed, rivaling the fifty-seven varieties of the famous pickle man.
Not only have they left the banking business to just "grow up" like Topsy in Uncle Tom's Cabin; but the Government itself has been one of the greatest obstructionists to the national growth of our banking business in its interference with the natural movement of the money of the country which by every economic law, and business right, belongs in the channels of trade, and not in the strong boxes of the Government.
Mr. Manufacturer: That is absolutely true. I was greatly impressed only yesterday by a statement made by the Secretary of the Treasury right on that point of Government interference with current business by withdrawing money from circulation and piling it up in the vaults of the treasury. In the light of what we have learned during our talks, it is simply appalling; indeed, it does not seem possible in a civilized country.
Secretary MacVeagh says in the outset, "No reform of your banking and currency system can be adequate which does not take the United States Treasury out of the banking business," and then adds:
"When the independent Treasury system was established the idea was that all the funds of the Government should be stored in the Treasury vaults in the form of money, just as the mediæval war lords kept their treasures in strong boxes. The independent Treasury system was established in troublesome financial days, when the State banks were not the safest places for thedeposit of money. The people decided that the public funds must be kept in Government vaults for safety.
"In this country, with our rigid laws fixing the minimum reserves the banks must hold, any loss of cash by the banks means an instant contraction of their loaning power. If the banks of New York and Chicago lose $100,000,000 cash, they must at once reduce their liabilities by $400,000,000. This means that they must reduce by that amount their loans to the business community.
"With the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. For this reason, an institution like the United States Treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market.
"The funds held by the great European Governments vary from $25,000,000 to $50,000,000. The coin, bullion, and paper money held as assets in the United States Treasury during the present Administration has varied from $300,000,000 to $350,000,000. In other words, nearly one-tenth of all the money in the country is held idle in the Treasury vaults. If this money were all deposited in the banks it would increase their reserves 20 per cent.
"The receipts and disbursements of the Treasury are most irregular. The Treasury receipts in 1907 exceeded the disbursements by $91,000,000. Two years later the disbursements exceeded the receipts by $118,000,000. For the past two years receipts have again exceeded disbursements. The general fund in the Treasury was $272,000,000 in 1907; three years later it had fallen to $106,000,000. Under our present system of keeping a large surplus Government fund idle in the Treasury these wide variations in the yearly balance not only seriously disturb the money market and the business of the country, but force the Secretary of the Treasury to enter actively into the money market as a paternal overseer of the machinery of credit.
"It not infrequently happens that surplus revenues accumulate in the Treasury just at a time when the banks are straining their resources to grant all the credits needed to finance a business boom. The Treasury then takes money out of the banks and hoards it just at the time when the country most needs it. If the business boom goes so far as to strain credit to the breaking point, then the Treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. In recent years the Treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. In December, 1907, following the money panic, the special deposits in the banks by the Treasury had reached $256,000,000. Three years later they were reduced to $4,000,000. In the fiscal year 1908-1909, the Treasury withdrew $100,000,000 from the banks.
"This state of affairs places in the hands of the Secretary of the Treasury a power greater than any American should have. The power of the Secretary to influence the money market by deposits or withdrawals of public funds is always dangerous. No Government officer should have this power. It has been a great burden, I believe, on the shoulders of every recent Secretary of the Treasury Department.
"If the people realized how dangerous is the power in the hands of the Secretary of the Treasury, they would insist that the Treasury be at once taken out of the banking business. Accustomed as we are to Government interference with the money market, few of us realize how the Treasury in the past few years has exercised the central-bank function of regulating the discount rate. The Treasury, by alternate deposits and withdrawals of the public money in the banks, as well as by other devices, has attempted to regulate the discount rate.
"The Treasury Department should be divorced fromthe money market and from the banking business, and the way to effect the reform is plain. We should have in this country a quasi-public institution not only to hold the ultimate cash reserves of the banks and to regulate the rate of discount, but to act as the fiscal agent of the Government. Such an institution would hold the Government balances as deposits, and the Government could check against them just as any large business concern checks against its balances in bank. With the Government balances deposited in such an institution the business of the country would never be disturbed by the Treasury hoarding up cash, and the Secretary of the Treasury would no longer be forced to meddle in the money market.
"As long as we have the present banking and currency system, we shall have panics—and no longer. Does not this alone create a state of emergency? What doubt should there be of the urgency of this legislation? Why should it take another wasteful and degrading panic to impress Congress? Why cannot 1907 suffice? There are many other things of prime importance to be secured through monetary reform, but if nothing were to be secured but emancipation from panics there would be abundant imperative reasons for immediate action by Congress."
Mr. Merchant: This statement of Secretary MacVeagh proves absolutely just what you said a moment ago, that the situation was appalling, and when you realize that this practice has been kept up ever since 1846, when the sub-treasuries were established, it is unbelievable.
The Act of Aug. 5, 1846, declared it a felony to deposit public money in banks.
The United States Government has been committing an economic felony ever since. It has been committing an economic crime against commerce and the laboring interests of the country ever since that Act was passed, and is doing it this very hour.
The Act of Feb. 25, 1863, establishing National Banks, authorized their use as depositaries of the public money except "receipts from Customs." Forty-four years later the Act of March 4, 1907, struck out the words "except receipts from customs." By the Act of March 2, 1911, bank checks were made receivable for Customs dues, but no step has been taken by the Treasury of the United States to make them so at New York, Baltimore, Boston, Chicago, Cincinnati, New Orleans, Philadelphia, St. Louis, San Francisco and Washington, where the United States Government still has its morgues for our money. Every day the checks are presented which are sent in in accordance with the law, and the actual money is withdrawn from the channels of trade; that is, the United States Government withdraws reserve money to the full extent of every dollar that is due it.
Mr. Lawyer: While Mr. Manufacturer was reading what Secretary MacVeagh said, I have been wondering what the people would do if the United States Steel Corporation, the Standard Oil Co., J.P. Morgan or John D. Rockefeller, or any of the railroad companies, or any other great interest, should collect and hold in safe-deposit boxes hundreds of millions of money, just as the United States Treasury does.
Mr. Farmer: I'll tell you what we would do. We would blow them up mighty quick, and hang them to boot, that's what we'd do.
Mr. Merchant: Gentlemen, just think what it means to withdraw these hundreds of millions of reserve money from the channels of trade, say in the fall, keeping in mind that every dollar that the Government grabs and withdraws, will support from five to ten times that amount of credit. The withdrawal, as Mr. MacVeagh said, of one hundred million dollars, means the contraction of from five hundred million to a billion dollars; this is not only a fool's practice, but it is an actual crime against the commerce of the country; a crime against the producers, a crime against the laboring men of the country.
Mr. Lawyer: How long, O Lord, how long, shall we remain the laughing stock of the rest of the world? But, let us see, can any man here give me a single reason why the United States Government should not deposit its money with the banks, precisely as all the other governments of the world do? It seems to me perfectly clear that the United States Government should treat its income precisely as this town does, this county does, this state does. Is there any conceivable reason why it should not act in this matter precisely as New York City, Chicago, New York State and Illinois, and every city and every state does?
Mr. Banker: Not one in the world.
Mr. Manufacturer: This discussion upon the development of banking in the United States and the present treasury situation brings out the necessary reforms most vividly to my mind from these two points of view, the banks, and the treasury.
First: Assuming that we are all agreed as to the result of our talk last Wednesday night upon reserves, that they must be national to be equal and adequate, our conclusions now are inevitable, (1) we must give to the National banks the power to do a Savings bank business, as well as a Commercial business; (2) we must give our National banks the power to do a Trust Company business; (3) we must give our National banks the power to issue a pure credit Bank Note precisely like that issued by the Scotch Banks and the Canadian Banks, and was issued by the five hundred banks in New England before the war. These notes will go to the Clearing Houses every day with the checks and drafts to be cleared at precisely the same time, and precisely in the same way.
Second: We must take the United States Government out of the banking business, so that its transactions will cease to be a disturbing factor in the everyday affairs of the commercial world.
Mr. Banker: You have outlined these necessary reforms splendidly, but there are just two more points inthis connection that must not escape our attention. They are these:
First: All these various forms of banking are distinct in character and economically the funds of each perform a peculiar function that must be recognized and observed or we shall make a great fundamental error in constructing what we hope will prove a sound financial and banking system. We must provide that the commercial function, the savings function, the trust function shall be kept apart by separating the funds arising from each, and keeping them completely segregated, in order that the country may always know just what its commercial fund is, as distinguished from its investment fund.
Second: There is such a great demand for Farm Mortgage Loans by those who are pursuing agriculture that I am convinced that some provision should be made whereby the farmers of this country could obtain money upon their lands, as cheaply as our great railroads and other corporations are able to do. I have given this matter much study, and as you gentlemen are aware, I am a member of the Committee appointed by the American Bankers' Association to investigate and report the best method possible to accomplish this purpose. Therefore I think that we had better consider it here.
Mr. Lawyer: I am in perfect accord with what you are aiming at, but it is almost eleven o'clock.
Mr. Laboringman: I have been waiting patiently to see whether you gentlemen were going to provide in some way for coöperative credit, but up to date, you've not peeped a word.
Mr. Manufacturer: Both of these subjects are really outside of a financial and banking system, the particular thing we set about creating. However, I am perfectly willing to take a night to discuss them, and if we should find that either or both of them should constitute a part of our plan I am ready to adopt them.
Mr. Banker: All right, I am agreed, and I think we allare agreed that it is not only fair, but advisable, that we take up the whole subject next Wednesday night.
Uncle Sam: Do you know, boys, I am really proud of the work you are doing; you've gotten on swimmingly. You have shown such fine moral courage in caving in when you found out that you were wrong instead of playing the part of the jackass that has not intelligence enough to discern when he is in error, and too obstinate to change, if he happens to find out by accident that he is wrong.
Mr. Manufacturer: Uncle Sam, I am a Democrat, and I look upon that as a personal stab.
Uncle Sam: Just wait a minute, or playing the part of the elephant, that is so turgid, or possibly designedly stupid, or so calm and by self-satisfaction lulled into a conservatism that amounts to reaction, and therefore refuses to move.
Mr. Merchant: Well, I'm a Republican, and that looks like a slap at me. However, I guess Uncle Sam is just in for a housecleaning tonight.
Uncle Sam: You're both all right, personally, but your organizations have been in wrong until just now there seems to be a patriotic soul-awakening, and it's up to you to redeem them, or there will be a housecleaning, and don't you forget it. I want men; men who have intelligence and conscience; men who are capable and have convictions; men who have moral courage; men who will fight if necessary to have peace; I mean that peace that rules only when right prevails and justice reigns.
Good Night.
TWELFTH NIGHT
LAND CREDIT BANK
Uncle Sam: Boys, by unanimous vote we agreed at our last meeting to devote tonight to the subjects that seem to lie close to the hearts of Mr. Farmer and Mr. Laboringman. You will remember that Mr. Farmer insisted that our work would not be complete unless we included in our plan a Land Credit Bank, while Mr. Laboringman declared that he had waited patiently to hear what we had to say about coöperative credit, but in vain.
Since Mr. Farmer is a member of the committee appointed by the agricultural society of his State to investigate the subject of Land Credit Banks, I presume he is loaded to the guards and can tell us all about it, and convince us, too, that he is right in his contention. I suggest that we let him lead off tonight.
Mr. Farmer: Well, gentlemen, I can assure you of my confidence of my ability to convince you of the importance of recognizing my contention; but I shall have to ask you all to be patient and agree to assist me in working out the plan that is best adapted to our needs and conditions. In studying this aspect of the banking problem, I think it will be well to follow the steps of development up to date, just as we have in considering other phases of this question, because experience is our surest guide to tell us what not to do as well as what we ought to do.
In the outset, however, I want to call your attention to the fact, that there is no subject of broader interest and more world-wide discussion than the productivity of the soil. You are all aware, no doubt, that there has been established at Rome the International Institute of Agriculture, and that last summer fifty different governments were represented there. Hon. David Lubin, of California, represented this government. The Presidentof the United States became intensely interested and with the help of our foreign representatives, particularly Hon. Myron T. Herrick, Ambassador to France, a vast amount of most valuable information has been gathered, studied, digested and classified. I think that we are now ready to take the matter up and legislate upon it. Our interest ought to be greater and more intense than that of any other nation on account of the number of our people engaged in agriculture and the staggering interest rates they are paying. Think of it.
The 12,000,000 farmers of the United States are adding over $8,400,000,000 to the national wealth each year. They are doing this on a borrowed capital of $6,040,000,000, on which $510,000,000 of interest is annually paid. Counting commissions and renewal charges, the rate averages at 8½ per cent for this country as against 3½ or 4½ per cent for Germany. If the American farmers had a thoroughly organized system of coöperative associations they would not only save this difference of $200,000,000 or $250,000,000 to themselves individually, but in the course of time the entire debt would be transferred to the societies, the interest paid to them, an economic waste stopped, and this stupendous sum restored to agriculture. The assertion is neither fanciful nor extravagant. It is below the actual ratio obtained by a comparison with the German figures.
There is practically no limit to the amount of capital that could be advantageously employed for rehabilitating worn-out and abandoned farms, opening up new areas, and introducing modern methods of cultivation; and it is of vital importance that this capital be obtainable at once in sufficient volume and on easy terms. The world-wide problem caused by the pressure of population upon the means of subsistence now confronts the United States in the very face of its matchless natural resources and vast acreage of arable lands still remaining untouched by the plow. The $385,000,000 of foodstuffs exportedlast year barely equaled 76 per cent of the annual interest charges on the debts the farmers owe.
The cause of the trouble is the lack of capital, and the remedy lies in financing the farmer and the landowner. This is the indisputable conclusion logically reached from examination into the actual conditions and from comparisons furnished by recent European history. The solution of the problem concerns the general welfare as much as does the currency and monetary reform, and it is gratifying to note that it seems destined to go side by side along with this undertaking. For as soon as the alarm was sounded the best talent of the nation became enlisted, and now bankers, merchants, professional men, legislators, and private individuals in town and country, many impelled purely by patriotic and disinterested motives, have combined their efforts to better the situation before it pass to the acute and critical stage.
The only instrument by which land-mortgage banks can finance themselves, draw money from the public for investment in loans, are the debenture bonds, but these bonds will not circulate freely nor far from the place of issue unless they are known to have the same underlying values and give the same rights to the holder, regardless of whether they be secured by mortgages in Texas, Massachusetts, or in any other State. But possessed of these characteristics as guaranties of law, there is no reason why debentures of large mortgage banks should not be listed in stock markets and sold, negotiated, and exchanged as readily as railway and municipal securities, and thus equalize and reduce interest rates for farmers throughout the country.
For our guidance that we may escape all cost of experience that has been paid for by others, I am going to give you the benefit of my study of the Government report upon this important subject and quote it extensively as the best authority we have.
You must all realize that this almost complete organization of land and rural credit in advanced Europeannations was not a haphazard and spontaneous growth. It was brought about by the insistence of public and private individuals, philanthropists, scholars, bankers, legislators, agricultural societies, government commissions, and national assemblies, all studying and working in a common cause. The history of their efforts in the middle of the past century reads much like an account of the agitation which has been started in the United States by the American Bankers' Association, the Southern Commercial Congress, the Federal authorities at Washington, and other bodies and individuals, for financing the farmer, improving agricultural conditions, and encouraging the movement back to the soil. In Europe the agricultural banks and credit facilities were created before agricultural or even general education was attempted. The United States began at the opposite end. The American colleges and systems for teaching agriculture are among the oldest and best in the world, and millions of dollars have been appropriated by the Federal and State Legislatures since the passage of the Morrill Act in Lincoln's administration to aid this science in one way or another. Incalculable good has come therefrom, but the results would have been far greater if financial education had gone hand in hand with this work. It would have led to the study and introduction of the rural banking methods of Europe generations ago, and so familiarized the American farmers with the uses of credit that the lack of capital and excessive interest rates would not now be interfering with the agricultural development of the country.
The development and history of Land Credit banks in Germany is most interesting and is as follows:
The land-mortgage banks are either joint-stock corporations or societies of borrowers. These latter are typified by the well-known German Landschaften, and are the originals of all land banks. Before them the private money lender reigned supreme. The organization of land credit, in fact, began with them. They undoubtedlyalso suggested the coöperative idea to Herr Schulze, because five, with nearly $60,000,000 of mortgage loans, were in existence in 1848, when he was trying to start his personal-credit society at Delitzsche. These peculiar institutions are associations of landowners, and have no shares and pay no dividends, the profits, if any, going to reduce the loans; and since they and their borrowers are identical, and managerial services gratuitous, they have been able to lend money at lower rates than any other kind of companies.
The establishment of the old Landschaften was the outcome of the indebtedness and distress of the nobility, and their membership in Germany is still composed mainly of that class and large landed proprietors. After the Seven Years' War the nobles, who owned nearly all the land, lacked the working capital necessary to repair and cultivate their damaged estates, and so were unable to pay their creditors. Frederick the Great ordered the suspension of interest on all estate debts for three years. The period was subsequently extended. The result was the withdrawal of the money lenders from agriculture, the rise of interest to ruinous rates, and a financial stringency that involved the public welfare. In order to relieve the situation this autocratic King decided to adopt plans that had been submitted by Herr Bühring, a Berlin business man. Accordingly, in 1769, by a royal fiat, he forced the nobles of Silesia to join an association whether they wished to borrow or not, and their lands were made jointly liable without limit for all loans granted by the association. Loans were granted only upon the consent of the directorate elected by the members themselves. Great care was naturally exercised, so no losses occurred, while immense credit came to the association.
This was the first Landschaft. Others were formed in the same fashion. Nine more were formed by the Provinces and one voluntarily. Then two companies were organized on the coöperative principle, so that there are now twenty-five Landschaften. The mortgages heldby them, all on farm lands, exceed $500,000,000, and the interest rate runs as low as 4 per cent and 3.5 per cent per annum. The bonds by which the money for these loans were obtained are secured by the mass of underlying mortgages and general assets of the issuing association, and ultimately by the unlimited liability of all its members. The collective guaranty and the fact that loans are made only to members constitute the characterizing features of a true Landschaft; but there is a growing tendency to limit this liability and substitute reserves in place of it.