(6) We have no effective agency covering the entire country which affords necessary facilities for making domestic exchanges between different localities and sections, or which can prevent disastrous disruption of all such exchanges in times of serious trouble.

This emphasized the absence in the United States of an organized system of domestic clearings. Under the system of "scattered reserves" that prevailed in this country, exchange or clearing operations depended necessarily upon the voluntary interrelationships established by the banks. According to the needs of trade, exchange balances were maintained in the larger centers because drafts on these centers naturally found wide acceptability. But these exchange balances were for the most part regarded as a part of the lawful reserves, and, as a bank credited its exchange balance with items the moment that they were remitted for collection, and further, as it charged against such balance only the items that were in its hands and for which remittance had been made, there was thus always a "float," as it was called, or mythical element in the balance. These exchange balances were regarded by the banks holding them as not essentially different from other deposits and no special reserves were maintained against them. But in times of stress the individual banks would draw down their exchange balances, and would often insist upon the remittance of currency. This would not only weaken the banks acting as the reserve or exchange agents, but resulted usually in times of panic in a complete breakdown of the system of domestic exchange.

No domestic clearing system

(7) We have no instrumentality that can deal effectively with the broad questions which, from an international standpoint, affect the credit and status of the United States as one of the great financial powers of the world. In times of threatened trouble or of actual panic these questions, which involve the course of foreign exchange and the international movements of gold, are even more important to us from a national than from an international standpoint.

The importance of reserve protection was discussed in an earlier chapter. The criticism here given calls attention to the fact that in this country we had no agency that was charged with the responsibility or that enjoyed the power of influencing the foreign exchanges or the exports and imports of gold. Under our system of scattered reserves relief in times of pressure could be obtained only when, at panic prices, we could persuade the foreigner to take our securities, or when, through altitudinous discount rates, we could persuade him to leave or to send funds here. We had no agency that could operate in the exchange market, now buying, now selling, with a view to influencing the rates. Similarly, having scattered reserves, we had no agency that could anticipate gold movements and effectively control the credit market at home.

(8) The lack of commercial paper of an established standard, issued for agricultural, industrial, and commercial purposes, available for investments by banks, leads to an unhealthy congestion of loanable funds in great centers and hinders the development of the productive forces of the country.

No protection of the national gold reserves

No standardized commercial paper

This criticism refers to the peculiar commercial paper situation that has.developed in the United States. Owing to the uncertainty that arose in connection with the depreciated currency during the period just after the Civil War, the tendency in American credit was toward short terms and liberal discount for cash. This resulted in the development of a single-name-paper system under which the merchant, borrowing on his own note, paid cash for his purchases, getting the benefit of the discount. Such paper was necessarily wrapped up with the makers' purely personal credit, and bore on its face no indication of the purpose to which the proceeds resulting from the discount would be applied. Advances obtained on the basis of single-name paper might be used for forwarding bona fide commercial transactions, but they might also be employed for equipment, or for other fixed investment purposes. The small dealer who could not borrow on his own account would take the longer term, but would in the great majority of cases be simply carried on open account by the big manufacturer or distributor in the larger centers. This open account and single-name-paper system supplied a relatively small amount of paper for the banks to purchase. Moreover, since the distributor in the large center tended to use his accounts receivable as a basis for advances on his own note by his local bank, it meant that the bulk of such paper tended to arise in the larger cities. Through the operation of commercial paper brokers, the paper of firms of national reputation could be sold all over the country, but this was not in sufficient volume nor of such unquestionable character that the banks could avail themselves of it to any large proportion of their resources. This led the banks in the smaller communities to deposit their surplus funds with banks in the larger centers, giving, as the Monetary Commission points out, the congestion of funds that was regarded as unhealthy.

(9) The narrow character of our discount market, with its limited range of safe and profitable investments for banks, results in sending the surplus money of all sections, in excess of reserves and local demands, to New York, where it is usually loaned out on call on stock-exchange securities, tending to promote dangerous speculation and inevitably leading to injurious disturbances in reserves. This concentration of surplus money and available funds in New York imposes upon the managers of the banks of that city the vast responsibilities which are inherent in the control of a large proportion of the banking resources of the country.

This criticism is similar to the one previously discussed, except that it calls special attention to the fact that the congestion of loanable funds was pronounced in New York. In this city the banks treated the deposits of their correspondents just as they would the deposits of any private individual, maintaining against them only the legally required reserves. Since in general the practice was to pay 2% interest on the balances of correspondent banks there was a strong incentive to the New York banks to utilize their reserves to the full. Yet the nature of these balances required that the credit based on them be embodied only in relatively liquid investments. The most valuable form of investment from this point of view was the call loan on stock-exchange collateral. Hence, as the Commission points out, a large proportion of the country's available credit was used for financing stock speculation instead of trade and industry. While the Commission refers to the responsibility that was imposed on the managers of the New York banks as the holders of so large a proportion of the country's ultimate reserves, it must be noted that that responsibility did not rest so heavily on these managers as to induce them to maintain any large surplus above the legal requirement.