of prosperity and their contraction in times of depression and panic. This action on the part of the banks is perfectly natural and, from their point of view and under the system in use, proper and necessary; but viewed in the light of the business interests of the country the existence of such a necessity constitutes one of the most serious defects in our national banking system.

These criticisms are borne out by the experience of Japan, which in 1876 adopted a national banking system modelled on that of the United States, but discarded it in 1882 for a system having a central bank with branches, modelled on that of Belgium, for the following reason, as stated by Prof. Garrett Droppers, B. A. (Harvard University), professor of political economy and finance in the University of Keio at Tokyo, Japan:*

"The chief fault to be found with the old system of national banks in Japan was the instability of its credit. The notes were amply secured, and always circulated at their full value. Nor is there a case of a note-holder having suffered through the failure of a bank or any illegal act. In all respects the holders of the national-bank notes were as fully secured as the holders of the national-bank notes of the United States or of any European bank of issue. The difficulty lay, not in the uncertainty of the value of the notes, but in the entire system of credit provided by the Japanese national banking system. It was found by bitter experience that the banks rapidly extended credit at a time when they should perhaps have curtailed it; and at the very moment when business required a certain amount of accommodation, these institutions were forced to refuse it. At times of expansion and confidence in the business world, the national banks found it easy to provide any amount of loans to their customers; but as soon as revulsion or lack of confidence appeared, each bank found itself forced to protect itself by refusing even the ordinary amount of credit. So long as each bank was forced to look out for itself by the ordinary

*"Money and Prices in Foreign Countries," Special Consular Report, vol. xiii, part 11, pp. 337 et seq.

laws of competition, it would begin to withdraw its assistance from the public just when the public needed it most. In other words, the national-bank system emphasized the extremes of business variations; it indeed stimulated confidence at times of speculation and expansion, but it no less surely strengthened the fears of the public at critical moments of panic.

"In establishing the central banking system the government wished mainly to remedy this evil. Its first object was to organize and control the unification of credit in its most sensitive part, for instance, the issue of notes. Such centralization the Japanese to-day believe is as necessary to the issue of money as it is to the government itself, and on this point they claim all European authorities are with them. If the market is overspeculative, the bank can moderate its action through its issue, at least to a considerable degree; and when a crisis appears, a panic is averted by an extension of the same power."

The experience of Japan is a parallel to that of the United States, and the report from which the above extract is taken is commended to the careful consideration of our legislators both as an evidence of the danger that would result from an enlargement of the note-issuing powers of our banks, and also as a suggestion for the remedy of existing evils in our banking system.

Turning to the consideration of the second proposal above stated, that for the retirement of the government notes,we find, as must be admitted by all, that the greenbacks are, and always have been, a popular and convenient money; that they have never been distrusted or discredited, and indeed in this respect are superior to any of the other forms of paper money, since they alone are a legal tender for all debts. The only reason that can be given for their retirement and the issue of interest-bearing bonds for their redemption, as would be necessary, is the alleged difficulty that has been felt in the last few years-never before since the resumption of specie payments in 1879-in maintaining the gold reserve of $100,000,000, which it has been thought necessary to keep for the redemption of these notes.

It has been pointed out repeatedly that the government is under no obligation to redeem these notes in gold, but that they have an undoubted right to use silver coin for that purpose if they wish. The difficulty, therefore, is not based upon any legal necessity. It is claimed, however, that it is necessary to redeem them in gold in order to maintain the parity of the notes with gold. Without stopping to inquire what other motives may have influenced such action, and admitting that it is necessary under the existing system to keep all forms of money at a parity with gold, is there any real reason for supposing that the redemption of the greenbacks in silver would have resulted in a premium on gold? The amount of gold coin and bullion in the United States has been stated by the Treasury as upwards of $600,000,000, for several years past (and is now nearly $700,000,000), of which upwards of $500,000,000 was in the banks and in general circulation. Now, the only real demand for gold is for export, when its value is higher elsewhere than here; for all domestic purposes the greenbacks are equally good, and indeed are generally preferred as being more easily and cheaply handled and transported. Any export demand for gold which has arisen in the last few years could have been met several times over from the stock in the banks and in general circulation, and undoubtedly would have been so met had the Treasury reserve not been available. There is not the slightest reason for supposing that the withdrawal of the necessary amount would have caused any premium on gold beyond the trifling one which has several times developed in some particular locality for a few days. Any premium on gold worth considering would cause the immediate withdrawal of all the gold from general circulation, and a fall in prices through the resulting contraction of the currency that would speedily bring gold imports, in the face of which even a slight premium on gold would disappear.

There is no necessity, therefore, for the government to redeem its notes in gold or, indeed, to keep $100,000,000 or any other amount as a gold reserve in order to maintain its notes at a parity with gold. With nearly one-third of our total circulation consisting of the metal, as it now does, it

would be wholly impossible for any considerable or permanent premium on gold to develop except through large issues of paper money by the government, or by banks, in excess of the present volume. Increased national-bank issues, however, under the proposal which we have been considering―uncertain in amount as they would be might produce such a result even if the greenbacks were withdrawn, and they would be quite likely to do so if authorized without such withdrawal. The fact is that the government bond issues of the last few years, which were made ostensibly to maintain the gold reserve, and for which the greenbacks are being blamed, were in reality made to meet the deficiency in the government revenue. This fact implies no discredit to the officials responsible for such issues of bonds-whatever may be thought of the method by which they were sold. Lacking any authority to sell bonds to meet a temporary deficiency in the revenue, it was doubtless fortunate that they could fall back on the legal fiction of issuing them to maintain the gold reserve, which they had authority to do; but it is certainly unnecessary to carry the fiction to the extent of denouncing the greenbacks as the cause of such issues.

From what has been said above as to the gold reserve it is not to be inferred that such a fund possesses no merit. While wholly unnecessary for its ostensible purpose, it is none the less a desirable thing in preventing any attempt to corner gold and in giving assurance of a supply of that metal to meet legitimate needs. For this purpose, however, it is essential that the reserve should be available for withdrawal whenever needed, and it should be expected that it would be largely reduced at times. If it is never to be touched, or if any reduction of the normal amount is to cause distrust and business apprehension, it is quite useless.

The fact that gold could be obtained from the Treasury fund more easily than from the numerous banks, which together carried a far larger stock, as evidenced by the fact that it was the Treasury fund that was resorted to when gold was needed for export, is a strong argument for the continuance of such a fund as a public convenience, and the retention of the paper money by which it is made available; and if any

anxiety is or has been felt as to the sufficiency of this fund to meet any legitimate requirements, it simply argues that a larger reserve is needed rather than the abolition of the existing one and of the paper money of which it is the ostensible guarantee.

This point will be touched upon again presently, but let us now consider for a moment what the conditions would have been during the last few years had there been no greenbacks or gold reserve, and their place had been filled by an equal amount of national-bank notes in addition to the present volume of such notes.

The $347,000,000 (in round numbers) of greenbacks are a legal tender, and available for the lawful money reserve of the national banks for the protection of their deposits, a function which the national-bank notes cannot fulfil. If they had been withdrawn the banks would have been forced to rely wholly upon coin for such reserve, and with the gold now held as a reserve distributed in circulation, there would still have been some $247,000,000 less lawful money available for the bank reserves than there was, and the demand for gold for this purpose would have been greatly increased. Besides this the volume of the banknotes would have been double what it was, and the burden of maintaining them at a parity with gold would have been thrown wholly on the banks. Under these circumstances would there not have been much greater danger of a premium on gold than there was?

The objection urged against the greenbacks, that under the existing law they are used as an "endless chain" to draw gold from the Treasury, has some foundation. It is not the greenbacks themselves, however, but a particular feature of the law, which allows them to be reissued for government expenses after being redeemed in gold, that is at fault. And even this is not objectionable on the ground cited, that it admits of gold being withdrawn continually from the reserve; but it is most decidedly objectionable on the ground that it confuses what is essentially a trust function of the Treasurythe maintenance of a reserve, and the issuing and redemption of notes-with its larger function, that of collecting the revenues and paying the expenses of the government. These two