GOOD FEATURES OF PRESENT LAW CONTINUED.

It is believed that every good feature of our present system is preserved. No change is made except where it is imperatively demanded in the public interest. The great merit of our present system is the uniform goodness of all the bank notes. "Every note of every bank, no matter what the bank, where it is, or what its condition, being secured in precisely the same manner and degree, passes current everywhere without a thought of discrimination." The bill continues this plan of having all the bank notes "secured in precisely the same manner and degree." This necessitates the continuance of the policy of restricting the note-issuing power to banks operating under authority of the General Government; that is, all bank notes will be issued by "national" banks. As now, these banks may be organized in any part of the United States by any number of persons not less than five. For the benefit, however, of communities of small population, it is provided that where the population is less than 3,000 the capital required shall be only $25,000. Persons desiring to establish a national bank must, as now, satisfy the Comptrollers of the Currency that they possess the requisite character and financial standing and that the capital is fully paid in. As now, the engraving and printing of the notes will be done by the United States Government, the expense being paid by the banks, respectively. This will enable the Comptrollers of the Currency to control the volume within the limits provided by law. It will at the same time preserve the uniformity of appearance of the notes (thus, as now, facilitating their currency), and the superior execution and special paper will continue to practically prevent counterfeiting. The inspection will continue to be by officers of the United States, but new safeguards have been added to render the supervision even more effective than it has been.

On account of their demonstrated safety, the bond-based notes are thought well of everywhere. And in some parts of the country, where there is a surplus of accumulated capital seeking investment even at a low rate, these notes may be issued at a reasonable profit. It seemed only right, therefore, as well as prudent, not to put anything in the way of the continued use of this class of notes where they are desired, until by the payment of our national debt the basis will of necessity be removed. And all the conditions of their issue remain the same as now, except that notes are issued to the par of the bonds and to the full amount of the capital, instead of being limited to 90 per cent as now, and the tax on circulation is removed. The 90 per cent limit was imposed at a time when the credit of the Government was low and it was deemed advisable to provide in this way a margin of safety. As the national bonds now bear a premium, and in view of the specific recommendation in last annual message of the President, it seemed that the least that should be done would be to allow the issue to par.

THE NEW PLAN FOR BANK-NOTE ISSUES.

Some of the arguments in favor of a currency based upon commercial assets, flexibly adjusted to the demands of business, have already been set forth. The present national bank-note system, under which the notes are secured by a deposit of interest-bearing bonds with the United States Treasurer, does not, as already pointed out, afford this responsiveness to the demands of business. On the contrary, under the high premiums which now have to be paid for the bonds, the remarkable phenomenon is presented that as interest rates rise in the money mar

ket, indicating the scarcity of the circulating medium, it becomes less profitable to issue national bank circulation and more profitable to loan capital directly, without putting it into the form of circulating notes. In this respect, as in respect to the accumulation of money in the Treasury in times of prosperity and large revenues, our present currency system works in the wrong direction, fettering trade when it most needs freedom, and flooding the circulation with redundant paper when the markets are most sluggish.

For this reason we believe that the currency should be based upon the commercial assets of the banks, and that there should be no specific pledged security except a safety fund of such amount as, from the experience of our own and other countries, would protect the note-holder against any possible loss. Your committee, however, mindful of the unfamiliarity of this proposition in the United States within the last thirty years, propose that no bank shall issue circulating notes which does not have on deposit as many bonds as are now required by law, receiving back its notes in the form of the present national-bank note to an amount equal to the face of the bonds. It must also deposit an amount of greenbacks equal to at least 25 per cent of its capital, in return for which it receives an equal amount of national reserve notes. It may then secure an amount of notes based on its general assets equal to 25 per cent of its capital, provided that bond-based notes have first been secured to an equal amount. It must, however, have deposited with the Government, to be placed in the bank note guaranty fund, a sum in gold coin equal to 5 per cent of these last notes, and must have made such arrangements for the current redemption of these notes at some clearing-house city, as well as at its own counter, as the comptrollers may direct and approve.

TWO ILLUSTRATIONS.

How would a New England bank probably act? In New England loanable capital is abundant. The people are very conservative, and the banks of that section will probably be slow to adopt the new note issue. A bank in Rhode Island, for example, will probably deposit bonds to an amount approximating its capital, take an amount of national-reserve notes not very greatly in excess of the minimum requirement, and none of the new notes. After the success of the new note has been demonstrated, after its entire safety and great desirability have been thoroughly established through some years of experience, then the new note will be gradually taken out there as elsewhere.

How would a Minnesota bank probably act? Minnesota is possessed of immense undeveloped resources. Capital invested with reasonable prudence yields large returns. Though possessed of much wealth for a young State, there are so many openings for profitable investment that there is large demand for loanable capital at a good rate of interest. A bank in Minnesota, therefore, would probably take at once the maximum permitted; that is, it would take out bond-based notes to the amount of 40 per cent of its capital, reserve notes to the same amount, and thereby secure the right to issue the new form of note to the amount of 40 per cent of its capital. And each year after four years from the passage of this act, it would reduce the amount of its bond-based notes, as provided in this bill, so that at the end of eight years from the passage of this act the Minnesota bank would be able to use its credit in the form of untaxed bank notes to the extent of 80 per cent of its capital, and with the same profit to itself and its customers as it can now use its credit to be drawn upon by check.

HOW THE NEW NOTES ARE RENDERED ABSOLUTELY SAFE.

As has been said, a bank note is practically the same thing as the demand upon a bank expressed in a check. Before a bank will give to any person the right to check against it, it will require that person to deposit either cash or something else readily convertible into cash. Before giving out its note, too, the bank will require the person to whom it is given to make a similar deposit. The ideal condition will be reached when, the person having made the necessary deposit, the bank can furnish him either a check book or its notes with equal ease and at equal cost, leaving the customer to select the form of demand obligation which will best serve his legitimate business purposes. As a matter of fact, the same management of the bank which will render the check safe will make the note safe. But, as has been said earlier, the note is to go everywhere and be used by people unacquainted with each other or with the bank. To facilitate its use, therefore, it must be issued under a system which can be readily understood and which will give to the people generally such assurance of the goodness of the note that it will be accepted without hesitation by everyone. What, then, are the provisions of this bill whereby the safety of the note issues is secured and made uniform throughout the country?

(1) Uniformity of regulation. Every bank of issue is established under national law and is subject to national supervision. And the laws and regulations are so carefully drawn as to reduce to the minimum the opportunity for organization without ample guaranty of responsibility and good faith.

(2) Uniformity of note form. Familiarity of appearance, if previous experience has been satisfactory, conduces to ready reception. The resemblance of all the bank notes to each other will continue to be an important item in giving them currency.

(3) Limitation of issues. The bank note issue of any bank can not at most exceed the amount of its paid up and unimpaired capital.

(4) Redemption agency. Each bank of issue may be required, under regulations to be prescribed by the Comptrollers, to make arrangements with some bank of well-known responsibility in a reserve city to redeem on presentation its notes, just as banks now make arrangements for the care of their checks and drafts. This will be another test of the standing of the bank.

(5) First lien. The bank note has the first lien on the assets of the bank.

(6) Double liability of the stockholder. The lien of the note takes precedence of everything else as to the double liability of the stockholders.

(7) Bank-note guaranty fund. Each bank in the system places in the hands of the Government a sum in gold coin, equal to 5 per cent of this class of notes issued to it, to be placed in what is called the "banknote guaranty fund." These sums constitute one fund, and from this fund (which will be a very large one) the notes of any failed bank will be promptly paid on presentation at any subtreasury in the United States.

(8) Assessment. If at any time the money in the guaranty fund should run low, the Comptrollers are authorized to assess each bank in the system each year to the extent of 1 per cent of these notes issued to it. Starting with the year following the resumption of specie payments, Mr. A. O. Eliason has examined all the bank failures whose accounts have been closed, numbering one hundred and one, and found that had

all the banks in the national system issued an amount of currency equal to their capital, or one hundred per cent, the assessment on the same to cover losses would have been infinitesimal, being only onenineteenth of one per cent per annum.

Recalling, however, that the banks deposit with the Government in gold coin an amount equal to 5 per cent of the notes issued for their redemption in case of bank failures, it is therefore clear that the currency will be safe beyond a peradventure.

In other words, briefly stated, the safety of the notes is secured on the mutual insurance plan, all the banks in the system being behind each bank.

SOLIDITY OF NOTE ISSUES UPON COMMERCIAL ASSETS.

With sufficient protection afforded by the bank-note guaranty fund against the occasional failure of a badly managed bank, the essential solidity of note issues upon commercial assets is bound up with the solidity of the business of the country. The advantage of having the whole commercial assets of the banks of the country pledged for the redemption of their notes lies in the fact that nearly the whole negotiable wealth of the country passes through their hands. The aggregate capital, surplus, undivided profits and individual deposits of national, State, and private banks, loan and trust companies, and savings banks, as reported by the Comptroller of the Currency at the date of June 30, 1897, or about that date, was $6,822,326,870.

It is fair to assume that many of these banks which are not national banks would enter the system under the benefits afforded by the bill reported by your committee. These same items for the national banks alone on December 15, 1897, were $2,887,000,000, and their loans were $2,082,608,324. Since these loans are all payable within ninety days, with a circulation of $300,000,000 issued by the existing national banks alone, the entire amount necessary to redeem this circulation in full would pass through the national banks within a period of about fifteen days. This control over quick assets, afforded by maturing commercial paper, as well as by accumulated cash reserves, explains the secret of the greater ability of the banks to maintain the current redemption of circulating notes than of the Treasury, with its comparatively small

resources.

The general security of banking upon commercial assets, and the fact that the system could not break down except under an avalanche of calamity which would carry national, state, municipal, and private credit down also, is strikingly set forth in the report of the monetary commission appointed by the business men of the country for the framing of a currency bill, from which your committee has embodied several sections in the bill herewith reported. They say in their report:

The objection that is sometimes made that the larger banks in the great cities would not issue notes because of an apprehended liability for other banks, is shown by statistics to be groundless. Eighteen hundred and ninety-three was the year of largest bank failures, but had all the banks of the country then issued notes up to 80 per cent of their capital, the amount of their assessment to make good the ascertained deficiencies of that year up to the time of the Comptroller's report of 1896 would have been only a fraction of 1 per cent. Had 80 per cent of the capital of all the national banks been issued in notes, upon the proposed plan, since the beginning of the national-banking systems in 1863, the assessment upon the banks annually would have been an amount so insignificant that it need not be taken into account. Taking the country banks as a whole, it is found that on October 5 last, they had $401,000,000 of the $631,000,000 of national-bank capital. Should they issue notes

up to 80 per cent of their capital they would have $321,000,000 of notes, and there would be $1,956,000,000 of resources against these notes, not counting stockholders' liability.

If these resources of the country banks are insufficient security for this amount of notes, they will be insufficient only because there would then be such a condition of business paralysis that Government, municipal, and railway bonds would be valueless, and also few, if any, banks in the reserve cities would remain solvent. The occurrence of this disaster is so improbable that its consideration may be dismissed.

An apt and striking contrast of the power of commerce to maintain the parity of the currency, as compared with that of a government, is found in the splendid record of the Bank of France during the FrancoPrussian war, and our lamentable experience during and after the rebellion. Though the German army swept everything before it and took possession of Paris, though the Emperor became a prisoner, the discount upon the notes of the bank did not exceed 2 per cent, and that only for a few months; while in the United States, although our territory was practically never invaded by the enemy, with a Government issue in the form of greenbacks, our paper was at a discount for eighteen years, the greenbacks being worth at one time only 35 cents on the dollar or were at a discount of 65 per cent. During all those years the middlemen and speculators were reaping a harvest that was only possible because of a depreciated currency.

THE SECURITY OF DEPOSITORS INCREASED.

The bill gives to the note holder, or to the Government in his interest, a paramount lien on the assets of the bank. Is this just to the depositors? Is it good public policy?

The note holder is himself a depositor. The one to whom the note was originally handed by the bank certainly gave to the bank, deposited therein, an equivalent. He was therefore certainly a depositor. In passing the note to the second holder the first holder transferred, for value received, to the second his right to the original deposit. And so on with each transfer of the note. The possession of the note is the tangible evidence that the holder has succeeded to the first holder's right as a depositor. The fact that the claim is in the form of a note shows that the note holder is likely to be a nonresident of the place where the bank is located. The depositor, on the other hand, is likely to reside in or near the home town of the bank. He makes his deposit to serve his own personal purposes. He is at hand to keep an eye on the management of the bank; able, in some measure at least, to keep track of its operations. If at any time he feels insecure he can promptly regain possession of his deposit. The note holder, equally a depositor, can not in the nature of the case thus watch over his own interests. If either must lose, it seems clear that the note holder should not be that one. In justice and equity his should be a preferred claim.

As has already been shown, it is for the public interest that the bank note, in order that it may be most serviceable as currency, should pass from hand to hand without the receiver being required to take time to examine into the standing of the maker. In the interest of the public, therefore, the unquestionable goodness of the note must be guaranteed by the system under which it is issued. And in order that the system may furnish this unquestioned guaranty, it is necessary that the notes be given priority of other obligations. The giving of this precedence to the notes is, therefore, in harmony with good public policy.