America's Money Machine

PART I / THE ROOTS OF REFORM
of New York the effect ofwhich, either because of the Senator's logic or
his influence, compelled a major retreat on the part of the Administration.
Senator Root had attacked Senator Owen's claim that the notes
issued under the pending bill would be amply guaranteed, since there
were at least twelve different kinds of security supporting them. Root
pointed out that it was not a question of the security, but the volume of
the note issue. A note issue based on gold and commercial paper, he
argued, had natural limits, since the supply of basic collateral would be
the exact measure of the needs of business. In a note issue secured by
government bonds, there was no limit to the volume, since the appetite
of a government for funds is voracious, money being a form of power,
and, since legislatures are reluctant to tax, a constantly available market
for the promissory notes of the government is a convenience of unimaginable
possibilities.
Root objected not only to the nature of the reserve under the bill, but
also to the reduction in the required reserves to be held by the member
banks. He cited the case ofa bank with, say, $100 million ofdeposits. The
current requirement as to cash on hand was 25 per cent, or $25 million.
Under the Owen bill this required reserve would be reduced to $18
million, but ofthis amount the bank need keep only a part in its own vault,
with the effect of reducing required reserves by about a half from the
previous standard. The end result would be a release of new credit into
the market with temptations to expansion greater than the business community
could resist, and an inflationary push greater than human prudence
and banking judgment could withstand. Root demanded, in conclusion,
that a gold reserve of at least 50 per cent be stipulated.
Alarmed at the breach caused by the Root assault, the Democratic
leaders hastily reconvened a Party caucus and agreement was reached to
meet Root's views, at least to raise the gold requirement from one-third
to 40 per cent, and to impose a progressive tax upon any deficiency in
the reserve.
On December 19, 1913, the amended Owen bill passed the Senate, 54
to 34 with the support of six Republicans, and went to conference with
the House over the amendments made by the Senate.
The conference moved with speed under White House pressure. Most
of the Senate changes were accepted, but one important decision was to
eliminate the provision for the guarantee of bank deposits which had
been a pet project of the liberals, particularly Bryan and Owen. The
Senate provision for a number of regional reserve banks between eight
and twelve prevailed over the House minimum of twelve. On December