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$150,000,000 and would still leave other legal-tender money in circulation in the country to the amount of a billion and a half of dollars. Your committee believe that a very large proportion of the existing amount of legal-tender notes of both classes, amounting in the aggregate to about $450,000,000, will be absorbed by the banks as reserve notes. The inducement to the banks to employ them for this purpose is the power to issue currency upon their general banking assets, which is set forth farther on.

There are several possible results which may follow the authority given the banks to assume the Government debt and issue reserve notes. It is conceivable and probable that a large proportion of the present legal-tender notes will be converted into reserve notes, and will cease absolutely to be redeemable at the Treasury except in the occasional cases of the failure or liquidation of the bank through which they are issued. If, however, only a small portion of the legal-tender notes are thus absorbed, the fact that they are canceled when redeemed in gold by the Treasury will give them a value which will at once remove all question of their prompt redemption and will give them substantially the character of gold certificates. The fact that a note is to be canceled on redemption and not reissued will tend very greatly to prevent its presentation for redemption. This is illustrated by the recent history of the Treasury gold certificates, whose issue was suspended when the Government gold reserve fell below $100,000,000 in 1893, and has never been resumed. Some of these certificates were received as the equivalent of gold, in payment for the bond issues of 1894, 1895, and 1896, but from July 31, 1896, to March 17, 1898, the whole amount presented for redemption was only $2,851,260 out of a total of $39,293,479 outstanding on the earlier date. The United States notes presented within the same period for redemption, according to the daily statements of the Treasury, amounted to $71,518,332 out of a total of $237,410,538 outstanding on the earlier date.

Even if it should happen that all the outstanding notes not exchanged for reserve notes should be rapidly presented for redemption, their payment in gold would soon terminate the obligation of the Government upon such notes, because they would be canceled and not reissued. If the entire gold reserve, which stood on March 17, 1898, at $170,432,007, should be thus paid out in the redemption of notes, that amount of notes would be permanently canceled, and the amount of legal-tender notes of both classes-United States notes and Treasury notes-remaining anywhere in existence would be reduced to about $280,000,000. The national banks held on December 15, 1897, the date of the latest available report, $172,596,020 in legal-tender notes or certificates of deposit covering the deposit of such notes with the Treasury. These notes are held to a large extent as necessary reserves, and if their amount is deducted from the notes left outstanding the whole remaining amount of notes would be reduced to the moderate sum of $108,000,000. It is probable that a considerable portion of these have either been destroyed or would be so carefully hoarded that they would not for many years reach the Treasury either for redemption or for transformation into reserve notes. In any conceivable situation the burden of demand liabilities outstanding against the Treasury would be so reduced that its present burden would be greatly diminished, and the ordinary gold receipts for customs and through the surrender of assay office checks for currency would supply an ample gold fund for all possible demands.

THE BANKS COMPELLED TO PROVIDE GOLD.

The purpose and effect of the proposed bill is to throw upon the national banks the entire burden of finding gold for the notes of the country. There is no doubt of their ability to do this if it is required by law.

The system proposed by your committee provides an easy and adequate method of obtaining gold for export from the banks without exposing the country or the United States Treasury to the alarm and convulsions which have attended gold exports during the last five years. The banks are required by the bill to maintain the 5 per cent current redemption fund in gold. Redemption agencies are authorized to be established at the various subtreasuries, and such an agency would undoubtedly be established by the Secretary of the Treasury at New York. The actual process of obtaining gold for export would be that any strong bank patronized by exporters would turn over the gold from its own vaults or from its reserves in the New York Clearing House. It is impossible to evade this obligation. In case of an effort to evade it, the process would be that a bank would deliver its own notes to a depositor making a draft upon his account. He would be under no obligation to accept them, but if he did accept them could at once present them for redemption in lawful money. The bank, still wishing to evade the payment of gold, might then tender him reserve notes issued either by itself or by other banks. But these reserve notes would be redeemable out of the gold redemption fund maintained by the banks, and it would only require their presentation at the subtreasury to secure their redemption from this fund. The banks whose reserve notes were thus presented would then be called upon by the Comptroller to make good the deficiency in their coin in the redemption fund and the burden of obtaining the gold would fall directly upon them. This being the case, it would be immaterial to the people of the United States whether one bank by paying its own notes or reserve notes shifted the burden of maintaining the redemption fund upon another bank. The banks in any case would bear the whole burden and would be compelled to so adjust their loans as to secure favorable exchanges, prevent the undue export of gold, and maintain the credit of the business community and of the Govern ment.

NO CONTRACTION OF THE CURRENCY.

While your committee have thus greatly lightened the burden of the Treasury under any conceivable conditions, they have not provided for any contraction of the existing circulation. The gold now kept in the gold reserve of the Treasury might be paid out in the redemption and cancellation of legal-tender notes, but this operation would simply substitute gold for paper in the circulation and would not in any degree diminish the legal-tender money in the hands of the people. A legaltender note, under the bill proposed by your committee, might cease to be a menace to the Treasury either by exchange for gold and final cancellation, by the assumption of its current redemption by the banks, or by the enhanced value which it would obtain from the fact that the quantity was diminished; but the legal-tender currency in the hands of the people would not be reduced by either of these operations. Your committee believe that the system of dealing with the Government notes which they propose removes every possible objection which has B & C- -5

heretofore been made to relieving the Treasury of their redemption, except such objections as may be based upon the desire that the Govern ment shall issue an unlimited volume of forced legal-tender paper which is not redeemable in coin or capable of being maintained at any fixed value.

The plan proposed regarding the extension of existing credit facilities we believe is equally free from intelligent objection. The permissive feature in regard to the legal tender notes, which leaves it optional with their holders to turn them into gold or reserve notes or to continue to hold them is carried out in regard to the proposed bank-note currency. The existing national banking system is taken as it is, and any bank so desiring may continue to issue circulation exactly as it has issued circulation heretofore. After a period of five years it is proposed to relieve national banks from the requirement of keeping bonds in the custody of the United States Treasurer as the basis of circulation. There is no requirement that the bank shall sell or dispose of the bonds, and, in fact, the majority of banks would probably continue to hold them as a part of their general assets. There is no ground for fear that this moderate permissive policy would cause any sensible depreciation of bonds, cause any loss by such depreciation to the banks, or throw any excessive quantity of bonds upon the market.

THE NEW PLAN FOR BANK-NOTE ISSUES.

Some of the theoretical 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 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 market, 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. It is proposed, however, to permit additional issues of notes equal to the amount of United States legal-tender notes which the banks are willing to assume as reserve notes. They then have the privilege of expanding their circulation, increasing their loans, and facilitating credit in just the degree in which they are willing to protect the Treas ury by assuming its current gold liabilities. A bank with a capital of $100,000 is required to deposit bonds with the United States Treasurer, as under existing law, to the amount of $25,000 at par, and may obtain circulation for an equal amount. It may then deposit United

States notes and receive in exchange reserve notes for the amount deposited, and may receive in addition notes based upon its general assets. If the bank avails itself of the privilege thus accorded, it would deposit $35,000 in United States notes, receiving therefor $35,000 in reserve notes, and in addition $35,000 in untaxed notes based upon its general assets. The reserve notes would constitute a current liability, but not an ultimate liability in case of failure or liquidation. The notes for which the bank would be ultimately liable would be the $25,000 based upon United States bonds and the $35,000 based upon its commercial assets. This would make a total of $60,000 in notes for which the bank would be directly liable. Against this amount it would hold bonds of a par value of $25,000 and a market value, if they were 4 per cent bonds due in 1907, at 114, of $28,500.

Provision is also made that a bank may issue additional notes, with the approval of the Comptroller of the Currency, subject to a tax of 2 per cent, if the whole currency-note circulation exceeds 60 per cent of the capital, and is less than 80 per cent, and may issue additional notes subject to a tax of 6 per cent when the currency-note circulation exceeds 80 per cent. The national-currency notes can not in any case exceed 100 per cent of the paid-up capital of the bank. The purpose of this provision is to afford a margin for issues in times of emergency, when currency is hoarded and the demand for it is unnaturally increased. There would be no danger of the abuse of this privilege, because it is left under the control of the Comptroller of the Currency, and he would look with peculiar suspicion upon applications for excessive issues of currency under normal conditions.

The security against the excess of note issues above the value of the bonds would be the general assets of the bank, and the note holder is given a first lien upon all the assets of the bank. There can be no question of the perfect sufficiency of such security. If there were no other security whatever, the losses to note holders would be but a fraction of 1 per cent in many years. Secretary Gage, in his annual report for the fiscal year 1897, stated, upon statistics prepared by the Comptroller, that of 330 national banks placed in the hands of receivers during the existence of the national banking system for 35 years, there were only 18 whose assets would have failed to fully cover their circulating notes under the system which he proposed of issuing 25 per cent of the capital in currency based upon commercial assets. This proposition would remain substantially true under the system proposed by your committee if the banks took out 60 per cent of their capital in currency notes, and the deficiency would be only slightly increased if they took out all the notes which it is possible for them to issue under the bill reported. If there were no security whatever except the assets of the banks, with the liability of their holders for the amount of their shares, the losses to note holders would be so small that they would hardly reach an appreciable per cent of the income of the humblest citizen, and would count for nothing against the safety afforded by a bank note currency in maintaining the metallic standard, or against the advantages to the country in the extension of credit in communities where it is now obtainable only at extravagant rates of interest.

THE BANK-NOTE GUARANTY FUND.

But your committee do not propose to permit even the possibility of a trifling loss to fall upon any holder of a note issued by a national bank of the United States. They propose a tax upon the banks for the crea

tion of a safety fund out of which may be paid the notes of any bank which fails with assets insufficient to pay its note holders in full. They propose, moreover, that in the case of any bank failure there shall be no delay in the redemption of the notes, but that they shall be paid from the general fund created by taxation upon the banks, and that these payments shall be afterwards reimbursed to the fund when the assets are collected and settled. This bank note guaranty fund is to consist at the outset of 5 per cent of the whole circulation for which the banks are ultimately liable. No guarantee fund of this kind will be required against the reserve notes. Provision must be made for their current redemption by payment by the banks to the bank-note redemption fund. But this is distinct from the guaranty fund, and the United States are the ultimate debtor for the reserve notes, and they do not fall as a burden upon the guaranty fund. The experience of all banking history demonstrates that this guaranty fund will be many times more than adequate for the redemption of the notes of failed banks. It can not be considered an excessive burden upon the banks, for it withdraws from them the use of only a portion of the currency which they are permitted to loan to the community upon commercial paper, in addition to the loan of such portions of their capital and deposits as are not invested in the required legal reserves.

It is proposed that if this 5 per cent guaranty fund becomes reduced or impaired by the redemption of notes of failed banks in advance of reimbursement from the assets the banks may be called upon to make good the fund. The fact that this liability is unlimited in some of the bills introduced into Congress has suggested the fear that strong banks may hesitate to enter the system for fear that they would be called upon to make large contributions for the redemption of the notes of weak banks. We do not believe that this fear is well founded. The very fact that it is not, and that a tax of 1 per cent a year would many times cover the possible losses upon such a currency, justify the fixing of such a limit. We have, therefore, provided that the liability of any national bank to the guaranty fund to make up losses caused by the redemption of the notes of failed banks shall never exceed 1 per cent annually upon its whole circulation. If it is conceivable that the demands of a given year should slightly exceed 1 per cent, it is not within the range of probability that they would equal that amount for a series of years, so that the impairment of the fund in a trifling degree for a single year would be made up in the following year or years. A liability of 1 per cent upon the circulation of a national bank is only the amount of the present tax upon circulation, so that we propose no added burden in any case, and the small burden proposed becomes contingent and improbable instead of fixed and certain. If the present tax of 1 per cent were to continue to be collected upon circulation and the bank-note circulation increased, as we believe it will within a very short period of years, to $300,000,000, the annual collections would be $3,000,000, and this would cover many times not only the losses in cases where failed banks had not sufficient assets to pay their notes, but would many times cover the entire amount of notes of failed banks, even where the assets were more than sufficient. The United States Treasury collected, from 1864 to the close of the fiscal year 1897, $81,411,384 in taxes on circulation; from 1864 to the close of the fiscal year 1883, $60,940,067 in taxes on deposits; and from 1864 to the close of the fiscal year 1883, $7,855,887 in taxes on capital, making a total of $150,207,339 for a period of thirtyfour years, or an average of about $4,400,000 per year. Your committee propose to lighten these taxes and to impose no contingent

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