fies that it is issued under that system. The Government performs a great service in that way, of course, to the people who want to use bank notes, and in both cases it performs a great service to the whole community in that it diminishes the amount of bullion and the number of bank notes necessary to carry on the transactions of the community, because it gives them both greater rapidity of movement and causes less of them to be required for the same volume of transactions.

If that is a true statement of the Government's functions in regard to bank notes, it has always seemed to me we should approach the subject with the fact in view that the duty of Government is not to repress these things, but to go on in the direction of the principle, the philosophy, which has given it its right to interfere at all, and simply provide for the greatest facility of movement, that being dependent on the goodness of the system that it devised, and, having done that, leave the people to take care of themselves.

MERITS OF OUR PRESENT BANK-NOTE SYSTEM.

In considering a proposal to change our system of bank note issues, it is proper that we candidly examine the system that we have, recognize its merits and preserve them, discover its faults and correct them.

Under our present system, bank notes can be issued only by banks operating under authority granted by the United States, and which are therefore called "national banks." The issue of bank notes by other banking institutions is not forbidden by law; but the United States levies a tax at the rate of 10 per cent per annum on all banknote issues other than those of national banks, the effect of which tax is to prohibit all other bank-note issues. A national bank may be organized in any part of the United States by any number of persons, not less than five. The minimum capital required is $100,000 actually paid in, except that in places of less than 6,000 inhabitants national banks may be established with a capital of $50,000. The persons desiring to establish a national bank must satisfy the Comptroller of the Currency that they are proper persons to be intrusted with this authority, that their financial standing will warrant him in granting it, and that the capital is all paid in.

As an antecedent condition to the transaction of business, a national banking association is required to buy in the market United States bonds to an amount the face value of which shall not be less than 25 per cent of the capital of the bank, but not exceeding $50,000. The entire capital may be invested in these bonds. Upon depositing these bonds with the United States Treasurer at Washington an amount of notes bearing the promise of the bank to pay the specified sum on demand may be issued to it equal to 90 per cent of the par value of the bonds so deposited, and not exceeding 90 per cent of the capital of the bank. Upon being signed by the proper officers of the bank, these notes may be used as currency. These notes are not a legal tender in payment of debt, except to national banks, all of which are bound to accept them at par; and they are receivable in payment of dues to and from the United States, except duties on imports and interest on the public debt. They are redeemable in lawful money at the United States Treasury, each national bank being required to keep in the hands of the United States Treasurer for this purpose a fund in lawful money equal to 5 per cent of its circulation.

The present system had its origin during the civil war, the prime object of the Government being to make a market for its bonds. Though the system thus had its origin, not in the demands of trade, but in the exigencies of the Government, it has in some respects served the purposes of trade excellently. In the first place, the notes issued under this system are safe. No one has ever lost a dollar through having in his possession a national bank note. They are good, whether the bank

by which they were issued and whose promise they bear remains solvent or not. Moreover, they are equally good all over the country. A note issued from a bank in Maine is good in California. Before the war bank notes were issued under State regulation. As might be expected, the regulations varied, those of some States being wise and those of other States being very unwise. As a consequence, some of the notes were perfectly good and others were almost or quite worthless. And even those that were good locally, where the methods and standing of the issuing bank were known, were rarely good outside of the State or section where they were issued. The present system has demonstrated that it is possible, without granting a monopoly of the note-issuing power to one bank, to have bank notes which are absolutely safe from loss to their holders through any mismanagement of the bank, and uniformly good all over the country. And the people of the United States would not and should not approve of any system which would fall short of the present standard in these respects.

DEMERITS OF OUR PRESENT BANK-NOTE SYSTEM.

But the system of bond-based bank-note issues is by its very nature open to serious objections.

The vital thing to remember in considering this subject is that currency is simply an instrument of trade, a means of effecting exchanges; that it has no other use or purpose, and that therefore its volume should depend upon and be responsive to the demands of trade. But in this vital matter a system of bond-based bank-notes signally fails.

In the first place, the volume of notes under this system is largely determined by the state of the Government's credit. The issue of notes is conditioned upon the prior purchase of Government bonds. If, then, the credit of Government be low, the bonds bear a high rate of interest and yet can be bought for a small price. Under such circumstances it will be profitable to buy the bonds and issue notes upon them. But as the credit of the Government improves the bonds bring a higher price and pay a lower rate of interest. Then it becomes unprofitable to invest in the bonds and issue the notes. As proof of the correctness of this reasoning, attention is invited to Table 5, in the appendix to this report, which shows the volume of national-bank notes in circulation each year since the establishment of the system. After the close of the war, when the process of paying the bonds or refunding into lowerrate bonds (indicative of improved public credit) was well under way, the volume of national-bank notes grew steadily smaller, shrinking from $339,081,799 in 1873 to $122,928,085 in 1890.

In the second place, the higher the prevailing commercial rate of interest the less likely are bond-based notes to be issued. For example, suppose that the market price of United States bonds bearing 4 per cent interest is 120. In that case, by investing $120,000 a bank can buy $100,000 of bonds. On the deposit of these bonds it can get $90,000 in circulating notes. But it is required to put up with the United States Treasurer a redemption fund equal to 5 per cent of its circulation. In this case the redemption fund would be $4,500. So that instead of having $120,000 to lend the bank would find itself with only $85,500 to lend, or $35,500 less than if it had not taken bank-note circulation. Now, if the local rate of interest be low, somewhere near that paid by the bonds, the bank may find it reasonably profitable to take out the circulation. But the higher the local rate the less inclined the bank will be to diminish the amount of its loanable funds by investment in low-rate bonds. As proof of the correctness of this reasoning

attention is invited to Table 6 in the appendix, showing the extent to which national banks in different sections of the country issue currency in the form of bank notes, as computed from data in the report of the Comptroller of the Currency for 1897.

The first group consists of the banks, 132 in number, having an aggregate capital of $17,530,250, in three typical New England States. The amount of bank-note circulation that could be issued on the minimum required deposit of bonds was $3,650,625, while the amount of circulation actually taken out was $10,036,585. The next group consists of three Western States-Nebraska, Kansas, and Missouri (outside of St. Louis)-with 264 national banks, having an aggregate capital of $25,457,100. The amount of circulation that could be issued on the minimum required deposit of bonds was $4,681,597, while the amount actually taken out was only $5,518,237. The next group consists of six Southern States, with 102 national banks, having an aggregate capital of $10,779,000. The amount of circulation that could be issued on the minimum required bond deposit was $2,273,400, while the amount actually taken out was only $2,568,317. That is, in the New England group, where the local rates of interest are low, the amount actually taken out was three times the minimum, while in the Western and Southern groups, where the local rates of interest are high, the banks scarcely exceeded the minimum.

In other words, to those sections of our country where capital is plentiful and where the rates of interest are low, our present system gives increase to abundance; while to those sections where rates of interest are high, showing the need of loanable funds, the system gives little relief. In order to secure bank notes for circulation a community must invest more capital in bonds than it gets back in the form of bank notesthat is, a community is required under our present system to send away a part of its loanable capital for investment at a low rate. But this is precisely what a community having inadequate loanable capital can not afford to do. And if a portion of the loanable capital be sent away for this low-rate investment the rate of interest on the remaining funds must be raised.

In the third place, as a corollary of the above, a system of bank-note issues based on Government bonds can not be responsive to seasonal demands. In the agricultural communities of the West and South the demand for currency during the three or four months in which the bulk of the crop is being moved is very much greater than it is during the rest of the year; and to be of most service the funds must be in the form of coin or bills, preferably the latter. These extra funds the banks in the vicinity ought to be able to provide through increased issue of bank notes based upon the values, promptly realizable, of the crops themselves; but to this seasonal demand the local banks are under the present system utterly unable to respond. To secure the funds the buyers of the products must go to the money centers and borrow. Their demand for funds must there meet and compete with other demands of the same kind, and the consequence is that they can command the necessary funds only by offering a higher rate of interest. This, of course, means that so much less can be paid for the products, and in so far as the rate is unnecessarily high there is an unnecessary loss to the producer. "The means to move the crops should be furnished by the crops themselves," and under a proper system of bank-note issues they will be so furnished, to the mutual advantage of the producer and the banker.

In the fourth place, as a second corollary of the above, bank-note

issues can not under the present system respond promptly to emergency demands for note currency. A good illustration of the delay in responding to such demands was furnished in the summer of 1893:

The New York banks held on June 1, 1893, a surplus of $21,000,000 in excess of their legal reserve. At that time the volume of national-bank notes outstanding was about $177,000,000. By the 1st of August extraordinary demands for currency had drawn down the reserve to $14,000,000 below the legal minimum, and the outstanding notes were only about $5,000,000 more than on June 1. By September 1, however, when the reserves were but $1,500,000 below the minimum, when the urgency was past and currency was once more comparatively abundant, the notes had begun to expand and had already reached $199,800,000, subsequently rising to $209,300,000 on November 1, notwithstanding the continued decrease in the demand for them.1

Having been called into existence not by the requirements of trade but by the exigencies of the Government, being based on the debt of the country instead of its wealth, on what our people collectively owe instead of what they individually own, our present system of bank-note issue is not a true bank currency, and is therefore unresponsive to the demands of trade, coming forth when and where there is little demand for it and responding slowly or not at all when and where the need is urgent. And the trouble is inherent in the system; it can not be remedied except by a change of basis. The one merit of our present system, and it is a very great one, is that the notes are good, and uniformly good, all over the country. Can a system be devised whereby this essential quality can be retained completely, giving us a currency absolutely good from Maine to California, yet ample in quantity to meet all the needs of business in every section and at all seasons, at the minimum of cost and with a maximum of efficiency? Your committee believe that the answer to the foregoing question is yes, and that the bill herewith reported embodies the plan whereby that result can be reached.

WHAT IS PROPOSED.

The wealth of a country should be the basis of its currency. The basis is furnished by commerce itself. The products of the labor of the people represent all there is of financial value (wealth) in a nation. Commercial banks, the friends of all classes of people, the longest-lived and soundest institutions known to history, are the custodians of the representatives of this wealth in the shape of commercial assets, and commercial assets, all time proves, are the highest form of security for note circulation. Notes issued by properly capitalized and inspected banks, to the extent of a portion of their paid-up capital, and made a first lien upon their assets, not specially pledged but held as general security, have behind them the only truly scientific basis for circulation in a country like ours, the basis being the product of the energy, the muscle, and the brain of our people. Trade consists in the exchange of these products. Banks are the natural facilitators of such exchange. They hold, in short, bills receivable, the paper representatives of the products themselves. As by the increase of products trade increases, so, scientifically and naturally, there is produced in an increase of assets a larger basis for note circulation. The means to move the crops are furnished by the crops themselves. What better basis for bank notes can be created than these. quick assets? Such bank notes, under regulations for daily redemption, modestly and automatically retire when they are not needed.

Graft this principle upon the national system. Abolish the oversecurity and the tax on circulation. Drop the United States bond special security. Adopt the general security principle, which is in such successful operation in Canada, making the note a first lien on all assets, including double liability of stockholders, limiting its issue to a percentage of the capital, with a guaranty fund, and other minor details to be arranged.

These words of Mr. W. C. Cornwell, of Buffalo, N. Y., in an address delivered in Chicago in 1893, are a prophecy of the spirit, motive, and

1 Report of the Monetary Commission.

method of the bill herewith reported. The bill proposes to recognize the principle that "the wealth of the country should be the basis of its currency," and that the special bond security should be abolished.

Such a currency, made absolutely safe, based upon and springing out of the production of the people, always proving responsive to their requirements and adequate to their needs, is truly a currency of the people and will serve them better and protect their interests more fully than any other can, provided always that it is kept as good as gold in their hands, by current redemption in that metal which is used as the standard of value by all the civilized world.

The purpose of this measure is to give to the cotton and wheat grower, the cattle-feeder, and the manufacturer a lower rate of interest when its full advantages are attained, in every part of the United States, and a currency ample for the legitimate requirements of the farm and the factory. It applies to our present banking system the principal of credit currency, which has been in practice in Scotland for more than two hundred years, and been aptly described as follows:

"It has provided Scotland with an elastic currency adapted to the conditions of her industries and adequate in volume to their changing needs. It has afforded an opportunity for entering business to thousands of poor but honest men and enabled them to lay the foundation of a comfortable home, and, in many cases, of a fortune.”

"It has convinced the people so conclusively of the value and safety of the banking currency system that no serious panic has ever lasted beyond a few days or has ever affected any of the banks except those which were justly the subject of distrust." (Conant's History of Modern Banks of Issue, p. 155.)

THE NECESSITY OF CAUTION IN MAKING CHANGES.

While the principles thus set forth are the fundamental principles which should govern the issue of currency, your committee have been conscious of the fact that the United States has been long accustomed to a different system of currency and that radical and rapid changes might induce anxiety and disturbance. We have therefore proceeded with an abundant measure of conservatism in proposing to apply these principles of currency to existing conditions in the United States. We have provided in the bill herewith reported a system which departs only by degrees from the existing system, and which at nearly every step leaves the field open for the competitive trial of the new system along with the old. Such a trial, it is reasonable to believe, would result in adherence to that which proves safest and most advantageous to the community.

Wide discretion is given to the Comptrollers of the Currency to arrest any undue expansion of bank-note circulation and to refuse to admit to the new system banks which do not prove their solvency and conservatism. The new system, moreover, is to be substituted only over a series of years for the old, and if at any step the substitution appears to involve danger either to the national credit or to safe rules of banking, it will be in the power of Congress to arrest the change before it has attained a dangerous momentum. Your committee, reinforced by the study of the banking history of all nations, so firmly believe that the new system will vindicate its soundness and benefits to the country that they have so adjusted the provisions of the proposed bill that the relations of the new to the old during the transition period will be essentially a question of the survival of the fittest.

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