In endeavoring to assign a cause for the financial troubles of 1884, Mr. Cannon, in his annual report to Congress for that year, stated that:
The many profound students of political economy have for many years endeavored to explain the causes which have led to financial troubles similar to those of 1857, 1873 and 1884. * * * It is apparent that a repetition of the same circumstances which brought about the monetary crisis of 1873 was largely influential in causing the crisis of 1884. Property of all kinds had been capitalized, bonds and stocks had been issued for the purpose of building railroads, carrying on manufacturing and other business, municipal and other public improvements, and commercial credit was extended until a point was reached where capitalists of this and other countries questioned the intrinsic value of these securities and the earning power of the property on which they were based. A decrease in the earnings of railroads. manufacturing and other enterprises followed and the entire business of the country was consequently restricted and deadened.
The local disturbance among the banks, national, state and private, in New York City was, as usual, their intimate relation in many instances with the New-York Stock Exchange, and the fact that a large portion of the loans made by the banks and bankers of New York were based upon the security of stocks and bonds, often speculative in their character, which were dealt in and regularly called at the stock board.
Mr. Cannon then proceeded to express some views on the lessons taught by this panic, the relation between banking and the legitimate business of the country, and its influence upon healthy trade and commerce.
The principles, he said, which underlie judicious and sound banking are the growth of an experience of many years. Loans should be so made as not to exceed a safe and conservative estimate of the intrinsic value of the property represented by the securities upon which they are based, and not upon a fictitious or inflated valuation. A distinct line should be drawn between legitimate business and speculative undertakings. Doubtful enterprises should be discouraged by refusing accommodations to those known to be engaged in their promotion, even though the possibilities of large profits may be assured.
The value of an exchange for the convenient handling of stocks and securities, he said, is unquestioned, but when the members of such exchange who have associated themselves together for the purpose of furthering the commercial business of the country, use the machinery of this exchange to create speculative values and to increase or decrease prices of stocks and bonds for speculative purposes, they engage in and encourage a form of gambling to the great detriment of the legitimate business interests of the country, and such operations should be prohibited by either State or national legislation, or by both.
The views expressed by Mr. Cannon in 1884 on this subject are unquestionably as wholesome and sound at the present time as they were then, and it would be well for the banking and business interests of the country if they were heeded. But the banker who heeds such advice usually does not need it, and, unfortunately, the one who needs it does not heed it. Too frequently the latter is found to be himself engaged in the promotion of speculative undertakings or identified with doubtful enterprises such as Mr. Cannon so properly condemned, and through him the bank with which he is connected.
As a rule, bankers are not inclined to assume unusual risks in the investment of the funds of their institution in speculative loans for the sole purpose of the large profit that may inure to the bank from such investments. It will usually be found that where such loans or investments have been made some of the officers or directors of the bank are individually interested in the enterprise in which the funds are risked, and if the venture proves to be successful, personally reap the benefit of the larger part of the profits, but, if unsuccessful, throw the burden of the loss upon the bank.
If all bankers were to adopt and strictly adhere to the golden rules laid down by Mr. Cannon for the guidance of their official conduct, there would be no longer any necessity for "Be it en-acteds" to regulate or control bank management, and financial panics, such as that of 1884, would cease to occur. But as long as human impulse is influenced by avarice and greed, just so long will financial disturbances, such as have been produced in the past from the causes stated, be repeated in the future, unless prevented by the remedial legislation suggested by Mr. Cannon, or by the enactments of Congress in later years.
Aside from the panic of 1884, very little of any particular moment occurred during the remainder of Mr. Cannon's brief term as Comptroller.
During the less than twenty-two months that Mr. Cannon held the office he made two reports to Congress. The first report was devoted largely to a discussion of the panic of 1884 and its causes, and the necessity for some legislation which would make the issuing of circulation more profitable to the banks. He expressed the view that while public confidence in national banks would enable associations organized under the Act to do a much larger and more profitable business than if organized under State laws, it was possible that they would be unwilling to submit to the restrictions of the national banking laws but for the privilege of issuing circulation under conditions that would make it profitable. Mr. Cannon, therefore, seemed to entertain the opinion that the circulation issuing privilege was the principal advantage of national banks over State institutions, and should the profit on circulation at any time be reduced to a point where its issue would not compensate the banks for the inconvenience of submitting to the restrictions imposed by the national banking laws, many banks would leave the system and reorganize under State laws, which were more liberal in the powers extended.
While the original purpose of the National Bank Act was to create a market for United States bonds by providing a uniform circulation for the whole country, based upon the security of such bonds, the issuing of such circulation was not compulsory, and the privilege long ago ceased to be considered the principal function of the banks. In later years of so little importance was this privilege considered that for a long time several of the larger banks issued no circulation at all, and a number of them the amount only of the minimum bond deposit required by law.
Mr. Cannon seems to have modified his views in regard to the importance of this privilege before he retired from office. In his second annual report he expressed the opinion that it was believed that the national banking system would be continued, even if the associations organized under it could not issue circulation at a profit, because of the greater prestige of national banks operating harmoniously under one general law, uniform throughout the whole country, over institutions organized under State laws widely varying in character, and, in some instances, incomplete or defective.
No feature of the national banking system received greater attention, or was more thoroughly studied and discussed by writers of all shades of opinion, than the currency-issuing function of the banks, and upon no question was there a greater divergence of views. On one phase of the subject only did all agree, and that was the need for a currency as safe as our bond-secured circulation but more elastic and responsive to the varying demands of trade and commerce.
Mr. Cannon, like nearly all of his predecessors and successors, thoroughly discussed this question. In anticipation of the time when the reduction of the public debt would make it imperative to provide some other security for banknote circulation than Government bonds, in his second annual report he reviewed the methods of issuing and securing banknote circulation by the principal commercial nations of the world, and while admitting that such systems successfully operated under other forms of government than ours might not be wholly adapted to our needs, he was of the opinion that from the experience of all some valuable deductions could and should be drawn, which would enable us to provide a currency that would adequately and satisfactorily meet our business and political necessities.
But years elapsed after Mr. Cannon expressed his views on this subject before anything was done. The banking and currency systems of the older nations of the world were thoroughly studied and analyzed by recognized authorities. Volumes were written upon the subject. Students of finance and authorized monetary commissions viewed their oprations at close range and at public expense, but no accepted solution of the problem was reached until the enactment of the Federal Reserve Act "To provide for the establishment of Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States and for other purposes," approved December 23. 1913.