Published online by Cambridge University Press: 13 December 2011
It is well known that contemporary critics of the National Banking System complained about its failure to meet peak demands for currency. Less often discussed are complaints about the system's inability to remove excess notes from circulation during periods of slack demand for currency—a problem that critics attributed to the lack of an effective redemption mechanism. Beginning in 1864, important attempts were made to reform redemption arrangements, both privately and through legislation, and redemption reform was a key component of the “asset currency” movement to deregulate note issue. This article examines the motives and outcomes of redemption reform efforts up to the passage of the Federal Reserve Act, which substituted a discretionary control over the currency stock for the automatic elasticity that the asset currency movement had originally sought.
1 See Smith, Vera C., The Rationale of Central Banking (1936; Indianapolis, Ind., 1990)Google Scholar; Cagan, Philip, “The First Fifty Years of the National Banking System—An Historical Appraisal,” in Banking and Monetary Studies, ed. Carson, Deane (Homewood, Ill., 1963)Google Scholar; Timberlake, Richard H., The Origins of Central Banking in the United States (Cambridge, Mass., 1978)Google Scholar; and Champ, Bruce A., “The Underissuance of National Banknotes during the Period 1875–1913” (Ph.D. diss., University of Minnesota, 1990)Google Scholar.
3 One of the few authors to notice the reformers' emphasis, Fritz Redlich, in The Molding of American Banking, part 2 (New York, 1951), 114–16Google Scholar, dismisses redemption reform as an “infatuation.” Mints, Lloyd W., A History of Banking Theory (Chicago, Ill., 1945), 230–31Google Scholar, observes that “the paramount importance of ‘contractility’ of note issues, as well as of expansionability, was repeatedly emphasized” by reformers, and that “adequate redemption facilities … were generally insisted upon” as a means of providing contractability, but he does not discuss redemption reform in any further detail.
6 Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, N.J., 1963), 50, 781–82Google Scholar.
7 George A. Selgin and Lawrence H. White, “National Bank Notes as a Quasi–High-Powered Money,” unpub. MS, University of Georgia (1992), discuss in more detail the “quasi–high-powered” status of national bank notes and its consequences. The remainder of this section draws heavily on that work.
10 Dunbar, Charles Francis, Economic Essays (1897; New York, 1904), 241Google Scholar; Sprague, “The Distribution of Money,” 527–28.
11 Anderson, George L., “The National Banking System, 1865–1875: A Sectional Institution” (Ph.D. diss., University of Illinois, Urbana, 1933), 353Google Scholar. The original ceiling was $300 million.
12 Friedman and Schwartz, Monetary History of the United States, 21n8; Commercial and Financial Chronicle (New York), 22 Jan. 1870, 102–3Google Scholar.
13 Cagan, Philip and Schwartz, Anna J., “The National Bank Note Puzzle Reinterpreted,” Journal of Money, Credit, and Banking 23 (Aug. 1991): 300–301CrossRefGoogle Scholar. The second Independent Treasury Act (1846) had established subtreasuries at New York, Boston, Charleston, St. Louis, New Orleans, and Philadelphia; subsequent legislation during the National Banking period removed Charleston and added Baltimore, Cincinnati, San Francisco, and Chicago.
14 Other determinants of New York banks' excess reserves were, in order of significance: 1) movements of gold and greenbacks between banks and the public; 2) movements between the banks and the New York subtreasury; and 3) international gold flows (Scott, William A., “Rates on the New York Money Market, 1896–1906,” Journal of Political Economy 12 [May 1908]: 273–98)CrossRefGoogle Scholar. From 1902 to 1907, Treasury Secretary Leslie Shaw actively intervened in the New York market by shifting funds from the subtreasury to the banks in the fall and back in spring, in an effort to reduce the seasonal fluctuations in banks' reserves and loan rates. See Timberlake, Origins of Central Banking, chap. 12; Allen, Andrew T., “Private Sector Response to Stabilization Policy: A Case Study,” Explorations in Economic History 23 (July 1986): 253–68CrossRefGoogle Scholar.
15 Kemmerer, Edwin W., Seasonal Variations in the Relative Demand for Money and Capital in the United States (Washington, D.C., 1910)Google Scholar; Allen, “Private Sector Response”; Donaldson, R. Glen, “The Sources of Panics: Evidence from Weekly Data,” Journal of Monetary Economics 30 (Nov. 1992): 277–305CrossRefGoogle Scholar; and Mankiw, Gregory, Miron, Jeffrey, and Weil, David, “The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve,” American Economic Review 77 (June 1987): 358–74Google Scholar.
16 Taking the differences between averages of end-of-quarter interest rates reported by Rich, Georg, The Cross of Gold: Money and the Canadian Business Cycle, 1867–1913 (Ottawa, Ont., 1988), 49–50Google Scholar, for the period 1902–13, Montreal call loan rates varied only 30 basis points between mid-year and year-end (5.3 vs. 5.6 percent), whereas New York rates varied 470 basis points (2.5 vs. 7.5 percent), and Boston rates varied 260 basis points (3.3 vs. 5.9 percent). Consistent with the international arbitrage opportunities seemingly available, Rich observes that “in the fourth quarter…. Canada typically acted as a lender to the New York money market” (178). But he notes that before 1914 risks and information costs apparently prevented arbitrage from equalizing Canadian and U.S. interest rates, or even rates within the two countries (151). Citing the variations in Montreal call loan rates, both over time and across banks, Rich argues against the view that the Canadian loan rates were fixed by collusive agreements (though deposit rates may have been thus fixed) (48–51).
17 Bolles, Albert S., The Financial History of the United States from 1861 to 1885 (New York, 1886), 215Google Scholar.
18 Walker, Amasa, “The New Currency of the United States,” Bankers' Magazine 12 (May 1863): 833–43Google Scholar, quotation at 836.
19 Williams, John Earl and Everitt, J. L., Report of a Committee on the National Bank Currency Act, Its Defects and Effects (New York, 1863), 8–9Google Scholar.
21 Hunt's Merchants Magazine, April 1864, 307. Redlich, Molding of American Banking, 114, dismisses “the fact that National Bank notes were not at par in New York” as the result of an arbitrary clearinghouse policy. In fact, the policy reflected the costliness to the banks of redeeming or otherwise discharging unwanted notes. In Chicago, where by contrast national bank notes appear not to have accumulated, the national banks agreed in April 1864 to accept all national bank notes at par (James, Growth of Chicago Banks, 357–61).
22 Hunt's Merchants Magazine, Sept. 1864, 248.
23 Frances Bowen, “The National Banking System,” Bankers' Magazine, April 1866, 773.
24 Dunbar, Economic Essays, 238–39.
25 Newcomb, Simon, A Critical Examination of Our Financial Policy during the Southern Rebellion (New York, 1865), 209–11Google Scholar.
26 Dunbar, Economic Essays, 289.
27 Congressional Globe, 2 April 1864, 1377.
28 The seventeen cities were: New York, Boston, Philadelphia, St. Louis, Chicago, New Orleans, Cincinnati, Baltimore, Louisville, Detroit, Cleveland, Pittsburgh, Milwaukee, Albany, Leavenworth, San Francisco, and Washington. The first eight cities listed continued from the 1863 act; Providence, in the 1863 list, was omitted in 1864.
29 Gallatin, James, The National Debt, Taxation, Currency, and Banking System of the United States (New York, 1864), 15Google Scholar.
30 Congressional Globe, 2 April 1864, 1378.
31 In 1837 New York city banks had resisted a similar state proposal to compel their par acceptance of upstate notes on the grounds that it would allow the country notes to “engross the circulation in New York”; see Dewey, Davis Rich, State Banking before the Civil War (Washington, D.C., 1910), 97Google Scholar. It is not clear why New York should have been expected to run a persistent balance of trade surplus with the rest of the state or country.
32 The plan is reproduced in Bankers' Magazine, Sept. 1865, 198—200.
33 Commercial and Financial Chronicle, 16 Sept. 1865, 354; Bankers' Magazine, Nov. 1865, 401.
34 The views of one country banker are set forth in a letter appearing in the Bankers' Magazine, Dec. 1865, 460–65.
35 Commercial and Financial Chronicle, 16 Sept. 1865, 354.
37 Bankers' Magazine, Nov. 1865, 402.
38 It is reprinted in the Commercial and Financial Chronicle, 14 Oct. 1865, 489.
39 Bankers' Magazine, Sept. 1865, 194.
40 Comptroller of the Currency, Annual Report (1865), 6–8.
41 Commercial and Financial Chronicle, 2 June 1866, 674—75.
42 Comptroller of the Currency, Annual Report (1866), vi. (Clarke had resigned in mid-1866 in the wake of policy disputes with both McCulloch and Hulburd.)
43 Myers, Margaret G., The New York Money Market, vol. 1: Origins and Development (New York, 1931), 404Google Scholar.
45 Comptroller of the Currency, Annual Report (1866), vi.
47 Comptroller of the Currency, Annual Report (1868), xxii.
48 Bankers' Magazine, Jan. 1867, 496.
49 Commercial and Financial Chronicle, 10 July 1869, 37–38; 22 Jan. 1870, 102–3.
50 For contemporary accounts see Laughlin, J. Laurence, Report of the Monetary Commission of the Indianapolis Convention (Chicago, Ill., 1898), 211Google Scholar; Commercial and Financial Chronicle, 3 April 1865, 422; and Hunt's Merchants Magazine, Oct. 1867, 289, and April 1869, 247.
51 Commercial and Financial Chronicle, 22 Jan. 1870, 102–3.
52 Congressional Record, 43d Cong., 1st sess., vol. 2. The $300 million ceiling on the aggregate issue of national bank notes had been raised to $354 million by the act of 12 July 1870.
53 One possible explanation for this otherwise curious provision of the act is that the banks, in rent-seeking fashion, wished to restrict costly interbank competition for circulation shares. Providing more redemption points could be a means of competing on note quality.
54 Cagan and Schwartz, “National Bank Note Puzzle,” point out, citing 1894 testimony by Treasury Secretary Carlisle, John G. (and contradicting Spurgeon Bell, “Profit on National Bank Notes,” American Economic Review 2 [March 1912]: 38–60Google Scholar), that in practice the subtreasuries in New York and eight other major cities redeemed national bank notes. The subtreasuries shipped the redeemed notes to Washington, where they were counted and sorted together along with the relatively few notes that banks themselves shipped directly to Washington. Fit notes, and notes for replacing unfit notes, were then returned to their issuers.
56 Commercial and Financial Chronicle, 22 Jan. 1870, 103; 11 July 1874, 27.
57 Bankers' Magazine, July 1874, 75.
58 This and all related figures are from U.S. Treasury annual reports.
59 Bankers' Magazine, Aug. 1875, 82–83.
60 American Bankers' Association, Proceedings (1875), 20.
61 For comparisons of the redemption facilities of the National Banking System with those of the Canadian, Scottish, and Suffolk systems, see Selgin and White, “National Bank Notes.” Circulation and Treasury redemption figures are shown in charts 1 and 2 of that paper.
62 Laughlin, Report of the Monetary Commission, 339.
63 Bell, “Profit on National Bank Notes,” 45–47.
64 Bankers' Magazine, Oct. 1874, 315.
66 Lautz, Frank W. gives a detailed description of the new facilities and assortment process in “How National Bank Notes Are Redeemed,” Galaxy 23 (May 1877): 647–56Google Scholar.
67 Bankers' Magazine, Nov. 1878, 326–27.
69 Commercial and Financial Chronicle, 12 Oct. 1878, 368.
70 U.S. Treasury, Annual Report (1880), 30.
72 For a contrary view, see Bruce A. Champ, Neil Wallace, and Warren E. Weber, “Interest Rates under the U.S. National Banking System,” Federal Reserve Bank of Minneapolis, Research Department Staff Report no. 161 (1993), who argue that the collateral restriction on note issue was not binding, and that national banks must have faced significant liquidity costs from redemption of notes.
73 Commercial and Financial Chronicle, 20 Nov. 1880, 521.
74 Cagan, “First Fifty Years,” 21–22, dismisses the elastic currency idea as a specious offspring of the real bills doctrine, though he elsewhere acknowledges (25–27, 38) the disturbance caused by unaccommodated changes in the public's relative demand for currency. In our view, the basic aim of the proponents of an elastic currency was simply to avoid such disturbances. Though the real bills doctrine can also be found in some of their writings, the case for an elastic currency does not depend on it.
75 Laughlin, Report of the Monetary Commission, quotations at 324, 263, and 325.
76 American Bankers' Association, Proceedings (1893), 45.
77 Dodsworth, W., “Our Paper Currency—As It Is and as It Should Be,” in Sound Currency 1895: A Compendium (New York, 1895), 199Google Scholar.
78 Testimony of James H. Eckels, Comptroller of the Currency, House Committee on Banking and Currency, Hearings and Arguments, 1896—97, 54th Cong., 2d sess., 8 Jan. 1897, 235.
79 Laughlin, Report of the Monetary Commission, 326.
80 Laughlin, J. Laurence, “The ‘Baltimore Plan’ of Bank-Issues,” Journal of Political Economy 3 (Dec. 1894): 104–5CrossRefGoogle Scholar; Commercial and Financial Chronicle, 15 Dec. 1894, 1033; House Committee on Banking and Currency, Hearings and Arguments, 1896–97, 54th Cong., 2d sess., 18 Feb. 1897, 409.
81 Redlich, Molding of American Banking, 116; testimony of William L. Royall, House Committee on Banking and Currency, Hearings and Arguments, 1896–97, 54th Cong., 2d sess., 19 Dec. 1896, 199.
82 Legislation enacted in 1890 required all Canadian banks to provide par redemption at a specific city in each of the seven provinces.
83 Testimony of T. G. Bush, House Committee on Banking and Currency, Hearings and Arguments, 1897–98, 55th Cong., 2d sess., 13 Jan. 1898, 277.
84 Dunbar, Economic Essays, 243; House Committee on Banking and Currency, Hearings and Arguments, 1897–98, 55th Cong., 2d sess., 20 Jan. 1898, 260.
85 Cagan and Schwartz, “National Bank Note Puzzle.”
86 Walker's bill was H.R. 171, 54th Cong. The others were bills written or endorsed by John Dewitt Warner (H.R. 5595, 53d Cong.), Theodore Gilman (H.R. 3338, 54th Cong.), Samuel Hill and Charles N. Fowler (H.R. 10289, 55th Cong.), and Fowler (H.R. 13363, 57th Cong.).
87 Laughlin, Report of the Monetary Commission.
88 On country bankers' opposition to branch banking see Livingston, James, Origins of the Federal Reserve System (Ithaca, N.Y., 1989)Google Scholar, McCully, Richard T., Banks and Politics during the Progressive Era: The Origin of the Federal Reserve System (New York, 1992), 96–97Google Scholar, and White, Eugene N., The Regulation and Reform of the American Banking System, 1900–1929 (Princeton, N.J., 1983), 83–90Google Scholar. Livingston appreciates the importance assigned to branch banking by proponents of asset currency, but he suggests that they wanted branching mainly as a device for centralizing reserves. By contrast, we believe that they wanted it as a device for active redemption and thereby regulation of the currency stock.
89 Roland P. Falkner, “The Currency Law of 1900,” Annals of the American Academy of Political and Social Sciences, May 1900, 47. The Gold Standard Act allowed national banks to issue notes up to 100 percent of the par value of the bond collateral.
90 American Bankers' Association, Proceedings (1907), 138.
91 Livingston, Origins of the Federal Reserve System, 155.
92 The Currency (1906), 13–14.
93 American Bankers' Association, Proceedings (1907), Appendix, 167–68. Emphasis in original.
95 Quoted in Livingston, Origins of the Federal Reserve System, 168. It should be noted that the New York currency committee, unlike the ABA commission, favored a government central bank as the best way to achieve an elastic currency (The Currency , 9–11). In its final report, the committee chose not to advocate that solution only because they considered it politically unrealistic (see Livingston, Origins of the Federal Reserve System, 259–63).
96 Mints, History of Banking Theory, 240–44, argues on somewhat different grounds that a tax on notes was unlikely to have given the note circulation the desired degree of elasticity.
97 American Bankers' Association, Proceedings (1907), Appendix, 164–65.
100 Commercial and Financial Chronicle, 17 Aug. 1915, 398.
101 Miron, Jeffrey A., “Financial Panics, the Seasonality of the Nominal Interest Rate, and the Founding of the Fed,” American Economics Review 76 (March 1986): 125–40Google Scholar.