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It is right, then, both in equity and in public policy to give to the note holder the prior lien on the assets of the bank.
Does this priority of lien, proposed in the bill, lessen the security now possessed by depositors! It does not. This priority of lien by the note holder is recognized fully by the present system. Under the present law the assets necessary to secure the note holder are taken in advance absolutely out of the control of the bank and are placed, in the form of Government bonds, in the custody of the Government as trustee for the note holder. Under the proposed plan, the assets are left with the bank for the use of its customers, except a small contribution for the guaranty fund, and the lien is used only in case of necessity. The lien in the one case is no greater than in the other. In both cases the safety of the depositor depends upon the way in which the bank is managed. Inasmuch as the proposed plan provides for even more careful supervision than the present law, the security of the depositor is increased rather than diminished by it.
INTEREST RATES WILL BE LOWERED.
The banker of to-day is not a money changer in any sense, but a merchant in the same sense that the storekeepers of the town are inerchants; for if you should look over the notes held by him you would find only another form of the goods in the various stores. He has collected the savings of one class and loaned them to another. As the goods are sold off and retailed out the proceeds are applied to the payment of these same notes which were originally given to pay for them.
Now, it is self-evident that any system of banking that will cut down the rates of interest on the notes of merchants and men engaged in productive industry will prove an inestimable blessing to the great mass of our people. When it is recalled that manufactured articles pass on an average through three distinct mercantile hands, and are carried largely on borrowed capital, from the raw material to the finished product, it is a matter of the greatest importance whether the rate of interest paid is 2 or 10 per cent. In fact, such a divergence in the interest rate of any country means success or failure, prosperity or poverty.
Under this bill, when the full advantages are realized, the bank with $100,000 capital will be authorized to issue $80,000 of its credit notes, or have, in other words, after deducting the guarantee fund deposited with the Government, $176,000 of gold coin and currency to loan its customers. Four per cent interest on the latter amount will produce the same income as 7 per cent on the former. Therefore, the people will have the use of nearly double the amount of coin and currency at about one-half the rate of interest they are now compelled to pay. Thus, the capacity to make larger loans means the capacity of the banks to reduce interest rates without loss of profits. It means that if any bank undertakes to resist the natural law of decreasing interest under increased facilities, new banks may be formed without sinking their capital in bonds purchased at a premium, and may compete for the legitimate profits afforded by reasonable interest rates. More than this, a currency based upon commercial assets, and not rendered rigid in volume by the deposit of special security, comes back promptly to the issuing banks for redemption. The tendency of recent years for cur. rency to drift to New York, where it is loaned at low rates of interest, would be largely arrested by the necessity of promptly sending notes back for redemption and by the retirement of notes which were not needed in the commercial centers. Notes thus received back could be reissued, and would, at the worst, be in the hands of the community for at least a time before they again took their flight toward the money centers. TABLE 2.-Redemptions in gold of United States notes and Treasury notes and exports of
THE BENEFITS OF BRANCH BANKING.
The bill reported embodies a recommendation that national banks be permitted to establish branches. Branch banking has not been familiar in this country since the liquidation of the successful State banks of Ohio and Indiana at the beginning of the civil war. It is a system in almost universal use in other civilized countries where the methods of modern finance are well developed, and is almost essential to the economical use of capital and the distribution of credit.
One of the most striking benefits of branch banking is that a branch may be created and maintained at a profit in a community without sufficient business for an independent bank. This would permit the extension of credit into many localities in the thinly settled portions of the country where it is now impossible. Branch banking, moreover, permits the more ready flow of capital from communities where it is not needed to those where it is needed than does the operation of independent banks. It carries into every community the amount which is there demanded and which is in less demand at other points. Branch banking may be compared, in the fluidity which it gives to capital, to a connected series of tanks with open pipes between, while the possible borrowings of independent banks are more like a series of tanks whose pipes require to be opened when any change is sought in the level of the fluid.
Branch banking in connection with reasonable freedom of note issues has produced such favorable conditions in Scotland and Canada that interest rates are almost uniform throughout those countries, even in the most remote sections, and disclose none of the striking differences disclosed in this country between rates in the money centers and in certain remote sections. The 10 chartered banks of Scotland have more than 900 branches, and the 38 incorporated banks of Canada have nearly 500, in each case for a population which is less than a tithe that of the United States. There can be no question, in the opinion of your committee, that the combination of the power to establish branches with the power to issue a reasonable amount in notes upon commercial assets would give a vigor to the credit system of this country which has been lacking under the present complicated and unscientific system of fixed Government issues, rigid security for bank notes, and the prohibition upon the power to establish branches.
THE ULTIMATE OPERATION OF THE BILL.
The bill reported by your committee looks ultimately to the elimination of Government paper money from circulation. Whether the process will be slow or rapid may depend upon the disposition of the banks and the turn of financial events. The reserve notes for which the banks are liable will be gradually reduced when the Government assumes the liability for such notes issued by failed and liquidating banks. With the withdrawal of bonded security also, the ultimate currency of the country will consist of gold and silver coin of full legaltender power, and of notes issued by the banks under the provisions of the proposed bill,
The growth in the wealth of the country and in its ability to retain at home a large portion of the great gold production of the United States will tend to swell the gold resources of the country until gold coin is likely to become a common factor in daily exchanges among the people. This condition of affairs will operate at once to simplify and strengthen the currency system and to increase the security afforded by the proposed law to the holders of bank notes. The banks will be required, when reserve notes and legal-tender notes have alike disappeared, to fulfill all requirements of law calling for lawful money by keeping gold and silver coin, and the present quantity of silver is likely to be so completely absorbed for retail exchanges that the bank reserves will consist almost entirely of gold. This being the case, it is obvious that the issue of a banking currency based purely upon assets, without either bonds or reserve notes, will involve no risk of undue inflation or of loss to the note holder.
The bill reported by your committee proposes no change in existing laws regarding reserves against deposits. The cash reserves required in reserve cities at the date of the reports of the national banks to the Comptroller on December 15, 1897, were $251,176,860, and the cash reserves required in country banks were $55,940,589, making a total of $307,117,449. The cash reserves held at the samedate were $410,568,427. These amounts are now held largely in legal-tender notes, but the abolition of such notes would leave a void which could be filled only by gold. If the circulation of the national banks, therefore, without allowing for any growth in the meantime, should rise to the amount of their capital on December 15, 1897, which was $629,655,365, the reserves held against deposits, with the requirement of the two special funds for current redemption and for the guaranty of the ultimate redemption of the notes, amounting to 10 per cent of the circulation outstanding, would in themselves exceed $463,000,000 in gold, or nearly 75 per cent of the outstanding notes.
It is upon the solid rock of metallic currency like this, with additional metallic currency in circulation among the people, that your committee propose to plant finally, by the gradual evolution of events, the monetary system of the United States. We believe that the arrangements proposed in the bill will accomplish this result gradually enough to avoid any shock to any vested interest, but that it will be accomplished so certainly that the United States almost upon the enactment of a measure promising such results will find their credit greatly enhanced abroad and placed upon unassailable foundations at home.
Believing that this bill, if enacted into law, will relieve the Treasury by destroying the endless chain;" will greatly diminish the amount of gold reserve required to be kept by the Government, and practically stop bond issues for its replenishment; will diminish the possibility and severity of panics; will provide a sound, ample, and elastic currency, responsive to the demands of trade in all sections and at all seasons; and will materially reduce interest rates, especially in the parts of the country where such rates are now high, the Committee on Banking and Currency respectfully recommend that the bill do pass, with the following amendments: On page 2, line 1, after the word "appointed” insert the words by the President”; on page 9, line 18, after word “exceeding” add the words in the sum of its bank-notes and currency notes”; and on page 24, line 5, strike out the words “such tax”, substituting therefor the words "the tax imposed in section thirty of this act.”
TABLE 1.- Apportionment of money in the Treasury on May 31, 1898, between the fiscal
department of the Treasury and the proposed division of issue and redemption.
TREASURY, FISCAL DEPARTMENT.
1, 602, 940 1, 325, 803 6, 740, 757
939, 903 12, 058, 123 1, 396, 260 30, 208, 559
60, 000 1, 754, 425 3, 495, 210 28, 731, 884
123, 512, 498 Less outstanding checks and drafts, disbursing officers' balances, etc... 52, 713, 989
Available cash balance...
70, 590, 394
DIVISION OF ISSUE AND REDEMPTION.
Gold coin and bullion:
37, 486, 149 5 per cent of $461,180,422 (silver dollars).
23,059, 021 25 per cent of $346,681,016 (United States notes), and $101,981,280 (Treasury notes).
112, 165, 574
gold by fiscal years, 1879–1897.
TABLE 3.-— Redemptions in gold of United States notes and Treasury notes, by months,
January, 1892, to December, 1897.
$43, 415, 283 $1, 702, 455 $45, 117, 738 4,784, 907 776, 045 5, 560, 952
809, 495 279, 590 1,089, 085 733, 525 284, 046 1, 017, 571 734, 747
431, 745 1, 166, 492 644,621 401, 575 1,046, 196 3, 122, 620 704, 175 3, 826 795 16, 218, 815 345, 252 16,564, 067 i7, 119, 814 257, 670 17, 377, 484 1, 849, 018 317, 865 2, 166, 883 15, 616, 190
418, 400 16, 034, 590 19, 787, 951 424, 744 20, 212, 695