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'Elastic currency' was first seriously discussed at the 1902 meeting of the American Bankers Association. Prominent bankers, among them Charles Dawes, arrived in New Orleans that year armed with addresses dealing with the currency problem. The debate which ensued was not over whether something had to be done, but over what form this action should take. To investigate the matter further, those assembled formed a Currency Committee, and at the San Francisco meeting held the following year, this Currency Commission reported in favor of "an emergency circulation subject to a heavy tax, which, it was hoped, would insure the redemption of this currency as soon as the emergency which had called it forth had passed."<ref name=":4" /> | 'Elastic currency' was first seriously discussed at the 1902 meeting of the American Bankers Association. Prominent bankers, among them Charles Dawes, arrived in New Orleans that year armed with addresses dealing with the currency problem. The debate which ensued was not over whether something had to be done, but over what form this action should take. To investigate the matter further, those assembled formed a Currency Committee, and at the San Francisco meeting held the following year, this Currency Commission reported in favor of "an emergency circulation subject to a heavy tax, which, it was hoped, would insure the redemption of this currency as soon as the emergency which had called it forth had passed."<ref name=":4" /> | ||
=== | === Before the Federal Reserve: the National Bank System and the New York Clearing House === | ||
Since 1863 America had operated under the '''National bank System''', a veritable relic. Ostensible decentralization left banks across the country at the mercy of New York. Created by treasury secretary Salmon Chase in the midst of the civil war, banks partaking in the system had to invest in a proportionate amount of government bonds, deposited with the treasury as collateral, in order to issue notes. Chase wanted to force banks to invest in government debt in order to finance the war, and in that desperate context, to that specific end, the system worked well enough. But half a century later it was an unwieldy and inflexible giant. Currency was inelastic since it could only expand via investment in government bonds, bearing no relation to the level of trade. Strict reserve requirements keep 25% of NY deposits locked away, and similar restrictions on other banks kept reserves largely immobile. At the top, there was nothing, as member banks acted in their own interest. In times of crisis, currency remained inelastic, strict requirements kept existing reserves immobile, and there was no central governor, nothing that could coordinate the system toward response. | Since 1863 America had operated under the '''National bank System''', a veritable relic. Ostensible decentralization left banks across the country at the mercy of New York. Created by treasury secretary Salmon Chase in the midst of the civil war, banks partaking in the system had to invest in a proportionate amount of government bonds, deposited with the treasury as collateral, in order to issue notes. Chase wanted to force banks to invest in government debt in order to finance the war, and in that desperate context, to that specific end, the system worked well enough. But half a century later it was an unwieldy and inflexible giant. Currency was inelastic since it could only expand via investment in government bonds, bearing no relation to the level of trade. Strict reserve requirements keep 25% of NY deposits locked away, and similar restrictions on other banks kept reserves largely immobile. At the top, there was nothing, as member banks acted in their own interest. In times of crisis, currency remained inelastic, strict requirements kept existing reserves immobile, and there was no central governor, nothing that could coordinate the system toward response. | ||