the notes for collection to the bank, and the payment would have to be made Payment is required-cash payment.

Mr. FOWLER. I understand Mr. Hill's question was, How do they pay it? They do not pay it at all. They act as agents to forward it tor collection.

Mr. GILMAN. They put it to the credit of the depositor; that is payment. They pay it out or send it on for collection, as they choose. Mr. HILL. They issue a certificate of credit to a bank, and that certificate of credit performs the function of a bank bill. Now, then, suppose the bank has taken it out against time securities. Then, of course, they have to be responsible, as they would for the payment of their own bank notes. But where is the power of the clearing house in the meantime?

The CHAIRMAN. What Mr. Hill desires to know is what you mean when you say "the party" will redeem it. What party? Where, who, how?

Mr. GILMAN. The operation is a very simple one, indeed. The bank which wishes to take out clearing-house currency would apply to the clearing house and deposit securities, and if the securities were approved by the loan committee, the clearing house would issue its notes to the bank at 75 per cent of the appraised value of the securities. The bank would then use the notes for the payment of depositors or any purpose in the ordinary course of their business. Those bills might come on to New York, and if they were sent to us, for instance, we might pay them out or deposit them in our bank. Our bank, if it had an accumulation of those notes more than it could use to advantage, would sort them out

The CHAIRMAN. When you say "more than they could use to advantage" what do you mean; do you mean pay them out?

Mr. GILMAN. Yes, sir; more than they can pay out in the ordinary course of their daily operations-they would sort out those notes and forward them to the different centers of collection.

Mr. HILL. Clearing houses

Mr. GILMAN. Or to their correspondents for collection, the same as any draft. They would then be presented to the bank that had made the obligation. They would be its demand obligation.

Mr. HILL. How do they identify them?

Mr. GILMAN. The bill provides that the notes shall state on the face to whom they are issued, and the bank whose demand obligation they are must pay them in cash that is satisfactory to the clearing house.

If $1,000 of them are presented, the bank would send $1,000 of gold or currency or a check or whatever would be acceptable to the clearing house that had issued them, and that must be done on the day that demand is made for the purpose of securing absolute payment of the notes, and to keep them at the lowest point that is needed for the demands of business.

Mr. HILL. Then it resolves itself practically into an unlimited issue of the bank bill by the individual banks, with the guarantee of all the banks composing the clearing house, and the bank itself must provide its own redemption, and not the clearing house for the redemption of the money.

Mr. GILMAN. Yes, sir; if you will allow me

Mr. Cox. It does not go that far by a long shot.

Mr. CAPRON. That is the point. In regard to the return of the note to the clearing house, won't you explain that?

Mr. HILL. Your illustration of France and Germany is utterly inconsistent, I think you will find, if you will examine carefully the French

and German systems, because they are required to hold 33 per cent

reserve.

Mr. GILMAN. The Bank of France is entirely free, and is under no restriction, except that of prudent management, to maintain any percentage of reserve. It could pay out all its reserve to sustain the commercial credit of France if it so desired, without the violation of any law. The six banks of issue of Germany are required to maintain a reserve of 33 of their note issues, but they have besides an unlimited power of note issue for emergencies. The French and German systems are therefore amply protected against monetary troubles and they do not have bank panies in those countries. Our country should be protected in the same way. If you will allow me to make another correc

tion of Mr. Hill's remark, and that was he said the proposed issue is unlimited. It is limited to

Mr. HILL. Seventy-five per cent

Mr. GILMAN. No, sir; limited to the par of the banking capital of the bank.

Mr. HILL. The clearing house notes are?

Mr. GILMAN. No bank can take out more clearing-house notes than the par of its capital.

Mr. HILL. Then it is really double—that is, in addition to their own bank issues?

Mr. GILMAN. Yes, sir.

Mr. FOWLER. Do I understand that the clearing house as an organization is responsible for a single cent of the obligations issued by any bank?

Mr. GILMAN. The clearing houses are responsible, and they hold securities to protect themselves against all loss, which have been approved by their loan committee. The clearing houses would also make a profit on the loans which would compensate them for the risk. Mr. FOWLER. No. Suppose the bank fails and the notes are perfectly worthless; who pays the notes that that bank has issued-those clearing house certificates?

Mr. GILMAN. The clearing house in the first place from the proceeds of the sale of the collateral securities in their hands. If there is any deficiency, it is assessed upon the members of that clearing house.

Mr. FOWLER. And a provision is made for an assessment; in other words, a mutual guarantee system?

Mr. GILMAN. So it is distributed as it was

The CHAIRMAN. Current redemption of the bank, final redemption of the clearing house. Mr. McCleary has the floor.

At this point the committee adjourned until Saturday, April 16, 1898, at 10.30 o'clock a. m.

COMMITTEE ON BANKING AND CURRENCY, Washington, D. C., Saturday, April 16, 1898. The committee met at 10.30 a. m., Hon. Joseph H. Walker in the chair.

Present: Messrs. Walker, Fowler, Spalding, Prince, Newlands, and Ermentrout.

STATEMENT OF MR. THEODORE GILMAN, BANKER, OF NEW YORK CITY-Continued.

The CHAIRMAN. Mr. Gilman, if you want to add anything to your statement of the other day, we will begin there.

Mr. GILMAN. I wish to begin with an historical note.

After the Revolution the process began of changing our laws and customs to bring them into harmony with the principles of the Declaration of Independence. Our banking system was based on the English model, and all the banks of the United States were, like the Bank of England, organized under special charters.

The Bank of the United States was the most conspicuous example of this system, and General Jackson overthrew it "to preserve the morals of the people and the purity of the elective franchise." The free or general banking law of the State of New York was then enacted, April 18, 1838, and was called a second declaration of independence. Banking in the United States on republican principles dates from that time. Its two features were a general law and a secured currency. Those principles have been maintained until the present time, and are now the basis of the Federal bank act. Bill H. R. 9279 does not depart from these principles, and the only changes it proposes are to substitute the clearing house, incorporated under Federal law, in place of an officer of the Government as trustee for the public to hold the collateral to the circulating notes, and bank assets as the security instead of Government bonds.

I would like to emphasize the point that the interests of the people are separate from and antagonistic to the interests of the banks under a banking system with an unsecured currency and a reserve of a certain percentage of obligations, provided there is no means of increasing reserves except by compelling liquidations by the borrowing public.

Out of many authorities on the subject I will read from S. Hooper's book entitled Currency and Money.

The CHAIRMAN. Samuel Hooper, of Boston?

Mr. GILMAN. Yes, sir; he writes as "a merchant of Boston" and once was a Member of the House of Representatives. He says:

Whenever the demand for specie has become so urgent that it is difficult to meet it, the banks that have issued the paper money become alarmed for their ability to pay specie. Then commences the remedy for the depreciation of such a currency. When the demand for specie has become so intense or the quantity of it so much diminished as to alarm the banks, the remedy commences. It is a sure though a sharp remedy. It is brought into operation by stopping all discounts at the banks and requiring the payment of all previous loans as they fall due. Traders and merchants are forced at such times to make great efforts to obtain money to pay back their loans to the banks. To do this they must sell property at low prices or borrow money at exorbitant rates. This is the only process by which to remedy the depreciation of a mixed currency consisting partly of paper money redeemable on demand in specie. It is a process which invigorates the currency at the expense of the industry and the enterprise of the country.

And hear what Hon. Nathan Appleton, of Boston, said, as quoted by Mr. Hooper:

But these alternations of bank expansions and nominal prosperity followed by bank contraction, disappointments, and perhaps failures, are very much to be deprecated. The banks, to be sure, have no difficulty in these cases if well managed; the whole pressure is thrown on the mercantile community.

The CHAIRMAN. The whole pressure of what?

Mr. GILMAN. Of a bank crisis; of a panic. The banks do not suffer; the whole pressure of the panic is thrown on the mercantile community. Mr. Hooper continues:

If paper money is ever useful to a country it can only be in great emergencies and it should be reserved as a resource to supply the means for the defense of the country when other resources are exhausted. At such a time it may be used for the business transactions within the country to relieve the coin from that service so that it may be used by the Government in the exigency for the common welfare.

Now, that is exactly what I said, and I did not know that Mr. Hooper had said it.

No blame should be imputed to the banks or to their directors for the inconvenience and distress caused by forced liquidation. They have consulted only the interests of the banks. In doing so they were true to the system.

Mr. FOWLER. Read that again

Mr. GILMAN (reading). "In doing so they were true to the system." That is, when they carry out the system according to its legal provisions.

Mr. FOWLER. It means more than that. It means they were true to the principle of banking.

Mr. GILMAN. If you will allow me to finish this I think you will see he refers to the system of banking then prevailing.

Mr. FOWLER. I know; but he refers not to the system of banking in any given time in the world's history, but to every relation which banking bears to commerce.

Mr. GILMAN. No, sir; he refers to banking under this particular peculiar system.

Mr. FOWLER. What system?

Mr. GILMAN. This system of a large number of banks issuing currency and holding the security themselves, which creates lack of confidence.

The CHAIRMAN. Each independent bank?

Mr. GILMAN. Each holding security in its possession and issuing its own notes. When a lack of confidence strikes the country, and these notes are sent home and the banks will not take them from their customers, and some banks fail and banking facilities are withdrawn, and their customers are compelled to liquidate and forced to sell out at great loss, then the panic which results from this state of affairs is due to the system

The CHAIRMAN. You mean due to the system that protects them? Mr. GILMAN. I am just quoting his words

The interest of the bank is at variance with the public interest. The customers of the bank sustain the loss while the banks have had the profit

The CHAIRMAN. Who says that?

Mr. GILMAN. That is what Hooper says. Then he goes on

The CHAIRMAN. Let us have that.

Mr. GILMAN. And says that he advocates as a first step to reformThat all banking should be under a general banking law, and secondly, that banks should be required to place security for their currency in the hands of a trustee. These are the two points behind the national banking law

Mr. FOWLER. I beg your pardon; you are mistaken. All the banks of the South and those following the New York guarantee system, where they put up the securities themselves, put up State securities and every kind of security, and the result was that they broke down completely. They absolutely destroyed the banks, and right by the side of it and succeeding it the system of issuing notes by the banks of the South went on, and through all these crises stood and sustained themselves and did not fail.

The CHAIRMAN. That is a matter which is absolutely incontrovertible. All statistics prove that fact.

Mr. NEWLANDS. Then Hooper is wrong.

Mr. FoWLER. If you will allow me, the possible defense of the proposition is this, the distinction is this, rather, that what you propose to put up is current liquidated wealth; that is the only defense you have

and that is your defense. In your case they put up the current liquidated wealth of the country, while under the system of New York and the one he refers to they put up the time obligations of the State, mercantile, etc.; and there are a great many men in the country to-day who, if they exhausted our Government bonds, would put up railroad bonds, school bonds, and every other sort of thing, and the whole thing has been accepted historically in every part of the world, and more particularly in this part of the country.

Mr. GILMAN. There have never been any losses on the clearing-house certificates; never have been, and never can be.

There have never been any losses on national-bank notes secured by Government bonds, and never can be. These are the two most recent instances of bank currency secured by assets in the hands of a trustee. The losses referred to by Mr. Fowler were due to defective security and not to the principle of a trusteed or secured currency. Many railroad bonds have become worthless, but no one advocates on that account to abandon the idea of having a trustee under the mortgage. A trusteeship is a necessity where the ownership of the obligations is participated in by many different persons. The Georgia law of 1838, if I remember correctly, allowed slaves to be used as collateral to bank notes. The limitation to specific classes of collateral is wrong in principle. The banks should be allowed to pledge their assets and the trustee-that is, the clearing house or their loan committee acting for them should determine as to the sufficiency of the collateral. Experience shows that by this method, on account of their contingent liability, the clearing houses will exercise great prudence to protect themselves from loss, and in so doing they protect the public also.

The CHAIRMAN. Let me ask you a few questions. How would the capital of the clearing houses be furnished?

Mr. GILMAN. The clearing house is only the representative of the associated banks. There is no separate capital, but a clearing house has the responsibility of all the capital of its bank members. Clearing houses are trustees in this bill.

The CHAIRMAN. Trustees of nothing?

Mr. GILMAN. To hold absolute security

The CHAIRMAN. That brings us right to the point. What is the absolute security they are to hold?

Mr. GILMAN. They are to hold such assets as the banks offer them, and which the loaning committee approve as good.

The CHAIRMAN. Just give us a list of the assets.

Mr. GILMAN. The list of the assets would be commercial assets, promissory notes, bills of exchange, convertible bonds and stocks, and other securities and evidences of debt. These assets are to be received as collateral security for the circulating notes of the said association. Mr. SPALDING. To the extent of 75 per cent?

Mr. GILMAN. The notes are to be issued at 75 per cent of the appraised value of the assets.

The CHAIRMAN. Now, the idea of Mr. Appleton and Mr. Hooperboth of whom I knew, and I have talked over these financial matters with them-in what you have quoted, went to the point of the coin redemption of currency notes issued by banks. Now, what provision do you make for maintaining the parity between paper money and coin, and how? Their point was that hat should be maintained with more certainty and without injury to the public. What is your scheme? Mr. GILMAN. Bill H. R. 9279 provides that security which is convertible, and which is approved as good security, is deposited with the clearing house as collateral for the loan of its circulating notes; and