Chapter 460: Announcing a Rate Cut
A middle-aged man who was walking in a hurry happened to pass by the door of the Union Bank. He suddenly stopped and looked at the sign of the Union Bank and asked in confusion, "Is your bank closed down?"
"Look at what you said. Of course our bank is operating normally." The bank employee standing at the door was unhappy. Although business was very bad due to the low interest rates of United Bank, it was still far from bankruptcy.
The man was very surprised by the deserted crowd at the entrance of the Union Bank, and asked, "Really, what business does your bank have?"
"You can deposit money and withdraw money, but that's all for now." The bank employee answered seriously.
The man looked at another bank not far away. He had just withdrawn money from that bank, and there was still a long queue at the door of the bank. However, the door of the United Bank looked very normal, just like it was open for business as usual. In contrast, he suddenly felt a special sense of security at the United Bank and said directly, "I want to deposit money!"
The interest rate is no longer important at this time. Being able to deposit and withdraw money successfully is much more important than the interest rate.
What do banks fear the most? A run. In theory, banks with unlimited cash are afraid of depositors coming to withdraw their money. Groups of depositors either withdraw their money or transfer large amounts of funds to other safer institutions. At the same time, it is not just depositors who withdraw their money. Borrowers will also default on their loans when they know that the bank may not be able to renew the loan after paying it off.
For the largest financial institutions, a liquidity crisis - particularly a lack of available funds, higher funding costs and an increase in nonperforming loans that reduce cash flow - can also be devastating.
The first bank run occurred in the Roman Empire, and it is not surprising that this happened in the great New Rome of America. When money market investors learned that the bank's loan portfolio was in trouble, hot money suddenly left and the bank was forced to borrow from government agencies to survive.
In theory, this is the best way for banks to survive a crisis, but the United States does not have a central bank. The First Bank and the Second Bank both existed for 20 years before closing down under heavy opposition. Therefore, this escape strategy that banks in other countries can choose is not possible in the United States alone.
The two attempts to establish a central bank in history were both frustrated: there has been no attempt to establish a central bank since then. Because any banking reform plan that involves the establishment of a central bank has been opposed by the citizens of the United States and ultimately failed.
Successive U.S. Treasury secretaries have continuously expanded the Treasury's authority and intervened in the money market through indirect regulation by releasing or withdrawing the Treasury's surplus currency. Since the Federal Treasury itself is not a central bank, it does not have the power to issue currency, nor can it mobilize the reserves of private banks. The indirect regulation it adopts is often insufficient to cope with sudden financial crises. In fact, it only has a certain function of preventing financial crises, but not anti-crisis functions.
The Chicago Daily Times seemed to realize that its unintentional mistake had caused panic among the citizens of Chicago. As a newspaper with an attitude, editor-in-chief Albert immediately began to remedy the situation and sent out a veteran night soil collector to calm the mood.
The next day's newspapers were full of Sheffield Union Bank's calmness, indicating that there was nothing to panic about.
For this purpose, we interviewed managers of the Chicago Union Bank and conducted a special report, asking the bank's managers to share their views on this groundless panic and the Union Bank's response plan.
"Our Union Bank's capital reserves are unparalleled. As for the solution? The interest rate has been half that of other banks for a long time, attracting high-quality customers. If there is really a solution, we received a call from the headquarters and the interest rate was reduced to 2%, which is one percentage point lower than before." The manager of the Union Bank of Chicago talked about it.
"By lowering interest rates to maintain market liquidity, and because our joint bank's capital reserves are extremely strong, if all banks can adopt interest rate cuts, the cash in the market will increase liquidity."
Why shouldn't United Bank dare to cut interest rates? There isn't much capital in the bank to begin with, and it relies entirely on slave owners for support. Without much capital, there aren't many depositors either. For a bank backed by United Company, it's completely easy for it to talk without any worries. I'm already so miserable, and I'm still afraid of an interest rate cut?
The situation is different for other banks, which have many depositors, which is much better than United Bank. The sad thing is that with so many depositors, these banks do not have much cash to resist depositors' cashing out.
After the report of that day, long queues also appeared in front of the door of the United Bank, but these people came there to deposit money. If it were a hundred years later, once the United States lowered interest rates, it would mean that it would soon start to flood the market with money to increase liquidity.
Now that the Federal Reserve is gone, and the bank run has spread beyond New York and across the country, the interest rate cut announced by United Bank will not increase market liquidity at all, because United Bank has no money.
They would only dare to do this if they had no money and no pressure of bank runs. Blair announced at the headquarters of Union Bank in New York that Union Bank would cut interest rates on all banks across the country to 2%, and called on other banks to follow suit, which would increase market liquidity.
Sheffield was, of course, the person who knew the truth about United Bank best. The money in United Bank was all his own. Excluding this part, the total deposits of depositors across the country were less than 10 million. He didn't even know how much of this less than 10 million in cash belonged to the employees of various industries of United Company.
The largest customer of the United Bank was the owner of the United Company, that is, the slave owner himself. He had money and was not afraid of bank runs. This was the main reason why Blair became a public enemy at this time.
The funds and account funds in other banks cannot have the same proportion as that of the United Bank. The United Bank is almost 100%, and even if you deduct the largest customer Sheffield, it is just a bank where you can deposit and withdraw money. For other banks, 25% is already very high, and many only have 5%.
This ratio will inevitably lead to bankruptcy if faced with a run, because there is no money in the bank, only many depositors. The difference between the United Bank and the other banks is that it has no depositors and no cash, but it has slave owners, while other banks have depositors but no cash.
"Lowering interest rates? I was wondering how the Chicago Union Bank could come up with this idea. It seems Blair was the one who came up with it." Sheffield put out his cigar, which had already been smoked to the bottom, and said with great satisfaction at his own frugality, "But now that financial institutions, banks, and trust companies are full of triangular loans, this is indeed a breath of fresh air."
"Why does your bank dare to do this? If you propose a rate cut, won't you become an enemy when other banks' debts are so serious?" Edith Rockefeller didn't understand why the United Bank made such a proposal.
"If our country had a central bank, lowering interest rates would definitely be helpful. But we don't!" Sheffield raised his eyebrows and gloated, "Blair was right in claiming that lowering interest rates could avoid the crisis, or at least delay it. However, the Union Bank is not a central bank. Other banks and financial institutions have huge debts and dare not follow suit to lower interest rates. Because these banks have no money in their accounts, they only have huge depositors. They are afraid of a run on the bank, so how can they lower interest rates?"
"Everyone wants the bank run to be over quickly, but your bank is actually cutting interest rates, which is simply forcing them to death!" Edith Rockefeller was shocked when she heard Sheffield's words. This was simply too crazy. Her man obviously wanted the bank run to spread across the country and cause all problematic banks to go bankrupt.
"My dear, you can't say that. If the cash flow of other banks is healthy, lowering interest rates together would definitely be the fastest way to quell the bank run. The fact that most banks are opposed now only shows that the bank run they are facing is justified. Even if the outbreak had not been delayed for a year or two because of the Knickerbocker Trust Company incident, the problem would only be more serious." Sheffield denied Edith Rockefeller's false accusations against him.
How could a slave owner wish that all the banks in his country would fail? Even if he really wished that, he could not admit it.
Historical materialism explains the relationship between chance and necessity. The central point is that the difficulties faced by many other banks are entirely their own problems. Even if they can get out of this crisis unscathed, they will surely make the same mistakes again if they do not correct the problems. The biggest lesson that history has taught people is that people never learn from others and their lessons.
As for Blair's move to let Union Bank steal the show from the Federal Reserve, Sheffield fully agrees. Anyway, the situation of Union Bank is like this, and this fire will never burn him. Let the market decide who is most qualified to survive. Isn't this the competition that the United States has always advocated? Why can't it be done when it comes to these bankers themselves?
The role of interest rate cuts is to allow investment expansion to make up for the lack of growth momentum caused by sluggish consumption, enhance market expectations, and curb the shrinkage of economic activities due to lack of confidence. But the problem now is that most banks are facing a run on their banks. For banks, trust companies and financial institutions, interest rate cuts mean that they are expected to go bankrupt.
The run on the bank soon spread to other trust institutions and began to spread to commercial banks. Even mainland banks and depositors had begun to withdraw their deposits from New York. The cash supply in the New York money market was already tight, and the stock market was bleak. Pessimism was spreading, and Wall Street was crowded with people withdrawing their money. Even outside the banks with the best reputations, anxious depositors lined up in long lines.
The surging crowds of people withdrawing money have blocked the door. Now this former director of the Knickerbocker Trust Company actually wants everyone to cut interest rates. This is simply crazy. Does he want everyone to die together?
(End of this chapter)
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