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The National Banking System

THE NATIONAL BANKING SYSTEM.

1. National banking is constitutional.

2. Objects of the national banking law.

3. Excellence of national bank-notes.

4. Defects in the system. Management of the reserve.

5. Why the present regulation was adopted.

6. How a depleted reserve is repaired.

7. How the reserves sent to New York banks are used.

8. Operation of call loans.

9. How a reserve-keeper gets money to return when it is requested.

10. Why call loans ought to be lessened.

11. Banks usually know that such loans are for speculative purposes.

12. A reserve kept with another bank is not a reserve.

13. How can an emergency circulation be provided? 14. Plan of a new state bank issue based on capital, etc.

15. Analysis of discounts.

16. Why restrictions should be imposed on bank-note issues.

17. Too many notes will be issued.

18. The danger would come from new banks.

19. Soulless adventurers would go into the business.

20. The safety-fund plan to secure their payment.

21. Objections.

22. If an automatic system of state bank issues were adopted there would be loose systems of banking in some states.

23. Their circulation would not be local.

24. Banks of different sections would exchange notes.

25. If state bank systems are established, bank-notes should be very dissimilar in form.

26. They should not be supervised by the state.

27. The state should not attempt to prop them up.

28. An emergency circulation should be established.

29. The action by the Bank of England on unusual occasions. The German plan of providing an emergency circulation. 31. How it works.

32. How it may be adapted to our needs.

33. Same subject.

34. Its adoption would ward off the use of it.

35. A permanent increase of the currency is no remedy.

36. The adoption of a plan ought not to be delayed until an emergency arises.

37. The circulation is ample for all ordinary occasions.

38. But not as well distributed as it might be.

39. The creation of small banks.

40. Objection to them.

41. Branch banks.

42. Other modes besides bank action of rendering property negotiable.

42. The danger in issuing certificates of property of fraudulent issues.

43. The issue of notes by borrowers on their property guar anteed by banks.

44. Their property would thus assume a negotiable character.

45. Objection to the plan.

46. Objection further considered.

47. The issue of notes by banks bearing interest.

48. No plan for state or private issues should be adopted until other measures of relief are tried.

1. The right of the government to establish a bank as an agency for aiding its operations was long ago de clared by the highest authority to be constitutional. Two National banks, one in 1790 and the other in 1815, have been established as governmental agencies. To them were confided the deposits and, besides keeping them, more important assistance was rendered by lending money to the government.

2. In 1863, the National banking system was estab lished. Its object was two fold. First, to furnish the people with a better bank currency than was then in cir culation p ; and secondly, to furnish a market for United States' bonds, which the government was then very de sirous of selling to get money for carrying on the war. At that time the aggregate National bank capital was limited to $3oo,000,000. Notes could be obtained by any bank to the amount of 90 per cent. of the par value of its capital, which it was required to invest in the bonds of the government. Some persons criticised this system because the banks made a double profit, one on their capital and another on their circulating notes, based on their capital. Had such critics understood the business of banking better they would have known that the banks had always earned this double profit. It was, perhaps, a little more apparent now when their capital was in vested in the obligations of the government, than before when it was invested by the State banks in various stocks, bonds and other obligations.

3. This system has well fulfilled the objects for which it was created. Such a perfect system of circulating notes has been established that they readily circulate in any part of the United States. This system also was a triumph in furnishing a market for the government bonds, as the full amount which banks were authorized to buy were soon taken. After the war was over, as the government was no longer a borrower of money, the banks were permitted to organize without any limit to the aggregate amounts of their circulation, and they then began to experience difficulties in getting bonds without paying a considerable premium for them. So the law was changed, and banks having a capital of over.$150, 000 were required to invest only $5o,000 in Government bonds. while the remainder could be invested in other obligations. Banks having a capital less than this amount were required to invest only 25 per cent. in Gov ernment obligations. Though permitting banks to in vest a portion of their capital in other securities, the law has not been changed in issuing circulating notes. A bank to-day, as in the beginning, can get them only to the amount of 90 per cent. of the Government bonds which it may own. If a bank has a capital of $1,000,000 and only $5o.000 is invested in government bonds, it can obtain and use only $45,00o of circulating notes. So, too, if a bank has a capital of $5o,000 and only 25 per cent. or $I2,5oo is invested in Government notes, it can obtain only go per cent. of this amount, or $11,250 of notes.

4. Two defects, which ought to be amended without further delay, have become apparent in the operation of this law. The first relates to the reserve. The National banks are divided into three classes with respect to the amount of reserve they must keep. The banks in the central reserve cities, New York, Chicago and St. Louis, are required to keep 25 per cent. of their deposits on hand as a reserve to meet the demands of their deposi tors. The banks in sixteen other large cities, called reserve cities. also must keep 25 per cent., but need keep only 121 per cent. of this amount in their own vaults ; the remainder may be kept with National banks in the central reserve cities. All other National banks are obliged to keep only 15 per cent. as a reserve ; and of this amount only 6 per cent. at home in their own vaults, and the remainder with one or more banks in the reserve cities.

5. This feature of the law was one of the strongest objections with many of the banks at the time of enact ing the national banking law. The more conservative bankers believed that these amounts were none too large to keep ; the less conservative maintained that they could judge more wisely than the Government how much they ought to keep, and therefore ought not to be restricted in this regard.

6. The object of a reserve is to have money for emergencies. Whenever, to meet a sudden demand, a portion of a bank's reserve is taken, after exhausting all other funds that it may have on hand, such action is justi fied, and it is required to make the amount good simply by cutting off loans, for the effect of such action will be to swell its funds through the payment of money by de positors and borrowers. The funds of a bank are like the waters of a stream which, if intercepted, will accu mulate. As money flows into a bank, if loans and dis counts are cut off, in a short time, ordinarily, its reserve will be restored.

7. It has been found by experience, that so much of a bank's reserve as may be kept with another can be used by it in only one way, namely, in the form of loans to speculators. This fact determines at once the destina tion of the larger portion of reserve money. Most of it is sent to the national banks in the city of New York. Of course they would not be willing to keep this reserve if they could not do something with it; yet it must be so loaned that if demanded it can be quickly returned, and speculators are the only persons who can borrow money on such terms. A bank keeping the reserve of another would hardly dare to lend it on time, because if it was immediately demanded, or on a very short notice, and it was not sent as desired, the results might be very serious. It may be asked, "How dare a person borrow money on such terms ?" The borrower gives such securities to the bank as are bought and sold in the New York exchange, and expects, if the money is suddenly demanded, that he can transfer them to another bank and get the money there to pay the other. Having faith in his ability to raise money in this manner, he borrows at lower rates than are paid by those who borrow for a fixed period.

8. One of the peculiarities concerning call loans is, if only a few outside banks call for their reserves in Nev York, borrowers have no difficulty usually in obtaining other loans in payment of the calls made on them in the manner described ; but it often happens that when out side bank demands its money from its reserve agent or bank in New York, many other outside banks demand their reserves at the same time. When this happens the situation to call loan borrowers is entirely changed. They cannot go to other banks with their securities and borrow money, for the reason that demands have been made on them for their reserve money, and they have none to lend. What, then, can borrowers do? Take their secur ities to the stock market and sell them. But when a large amount of stock is thus suddenly thrown on the market, by virtue of the operation of the most familiar of all principles, that of supply and demand, its price rapidly falls. Moreover, the decline is accelerated by the fact that buyers are scarce because they are unable to borrow money from the banks to pay for them, even at lower prcies. Not infrequently banks, knowing that if the securities for their loans are sold the sums realized will not be enough to pay the amount borrowed on them, hesitate to throw them on the market. If they do, they will sacrifice a portion of the amount due to them besides destroying the stock market itself.

9. How, then, can a bank get money without selling the securities thus held? It can cut off loans to the mer cantile classes and by so doing accumulate a fund for paying back to the banks the sums due to them. Thus one class or the other must be strangled to collect money to pay the reserves due to outside banks.' 1o. There is another consideration worth noticing. The National banking law authorized the creation of banks to assist the mercantile classes. The seventh clause of the fifteenth section, states clearly the objects of thees institutions. By it they are authorized to con duct through their officers or properly authorized agents the business of discounting and negotiating bills of ex change, promissory notes and other evidences of debt ; to buy, sell and exchange coin and bullion ; to secure deposits ; to loan money on personal security, and to obtain and issue circulating notes. These things are to be done for the mercantile classes, and not for investors or speculators. It is well known that almost all loans made on demand are to speculators, and successive con trollers of the currency have criticised the conduct of hanks in feeding this class with money contrary to law.

II. It may be contended that banks do not know whether money borrowed from them is to be used for speculative purposes or not ; this objection is narrow and technical. In truth banks usually know that call loans are of a speculative character. But if banks were re quired to keep their reserves at home, the chief source of supply for speculators would dry up, and the legiti mate business of the country would be an enormous gainer. Of course banks would still continue to send money to New York to pay their drafts, but not nearly so much as they now send there. What, therefore, ought to be done is to amend this feature of the National bank ing law, and require banks to keep all their reserves in their own vaults. Perhaps if this change were made, the amount of bank reserve in the smaller places might be lessened. Perhaps if the country banks kept 7 or 10 per cent. it would be sufficient; and banks outside the largest places 15 per cent. or possibly 20, or some other figure lower than the amount now required. Whatever might be the amount, it would be an actual reserve, for it would be in the actual possession of its owners and at their complete command.

12. At present this feature of the law to a consider able extent is a farce, because a reserve kept with another bank cannot be properly called a reserve. Seventy-five per cent. of it is loaned, and if it could not be, the re serve agent would certainly not be willing to receive it and pay interest thereon. This process of having, keep ing and lending a reserve at the same time is the most remarkable sleight-of-hand performance yet practiced with money.

13. The other feature of the law requiring amend ment relates to the circulation. The problem of banking is a peculiar one. The great mass of deposits are payable on demand, yet in truth, as all know, are loaned out, and therefore cannot be had if demands were suddenly made for all of them. What the banks need is some method whereby on a sudden emergency they can get control of money or substitutes that will satisfy their depositors.

Until this is done a shadow will always rest on the busi ness of banking. The question then is, "What change can be made for relieving bankers of this peculiar situa tion ?" 14. A change has been strenuously urged of late years in the system of bank-note issuing, permitting banks to issue notes by State authority on the strength of their capital, surplus, undivided profits and discounted paper. If this change were made, a bank could readily obtain a supply of notes in times of emergency and thus the danger that now confronts them would pass away.' 15. Let us look a little more closely into the function of bank-note issuing for the purpose of finding out the reason for making the change. A debtor owes his credi tor $1o,000, and offers to give him his note for four months. The creditor tells him that he prefers money or other notes, as he is a little short himself, or is afraid of his debtor's ability to pay his note when it becomes due. The creditor says to him, "I am unwilling to take your note, but if you will go to the bank in this place and get its notes, I am perfectly willing to take them in payment of your debt." The debtor goes to the bank and asks the cashier or other officer if he will discount his note of $1o,000 for four months, and to this question a favorable reply is given. The notes of the bank to the amount of $1o,000 are given to him and these are taken to his creditor, who is perfectly willing to receive them in pay ment of his debt. What is the nature of this transaction between the borrower and the bank? They have merely exchanged credits. The bank has received the note of the borrower, while he in turn has received the notes of the bank. His creditor is willing to receive these be cause he can readily exchange them ; they have a better circulating power. a larger credit, than the notes of the borrower. And in general it may be said that the notes of a bank have a much more extended credit than the notes of individuals, and for this reason borrowers desire to obtain them. So they are exchanged and for this serv ice a bank receives compensation from the borrower, known as interest. The borrower may be regarded in another aspect. He is desirous of getting something more than the mere credit of the bank. He has products of various kinds to sell, grain, cattle and the like, and is unable to sell them. What he wishes to do is to get other people to carry them for him, just as the iron man ufacturers in England, who have warrants issued against their iron, are able by this method to get others to carry it for them. If we analyze the function of borrowing a little further we see that when the borrower gets the bills of a bank and gives them to persons whom he owes in payment of labor, store bills and the like, the receivers are truly carrying his products for him until the time comes for returning a similar amount to the bank.

16. We have shown elsewhere why the notes of a bank should not be considered as money. But they serve as an effective substitute for money whenever they are readily taken, as the notes of the National banks have been from the beginning. Now it is maintained, and with strong reason, that banks ought to be permitted to exchange their credit for the narrower credit of indi viduals without restrictions ; and that, if they were per mitted to do so, they would make more money, while the business world would gain greatly. In theory nothing can be said against such a use of credit. And a system founded on such a use of it is scientific, while the present system is not. No issue is presented between myself and those who believe in a self-adjusting, or rather, individ ual adjusting of bank credits for private use. The objec tions here given are of a practical nature, resting on the moral unfitness of the people to adopt such a system without grossly abusing it. We shall briefly note some of•the objections.

17. First, there is great danger that banks will abuse their credits, and issue too many notes. It has been said in reply to this that there is no danger of an excessive issue, because if more notes are pushed into circulation than are needed, they will return to the issuers for re demption. An excess, it is contended, cannot be long kept in circulation. To this it will be replied that the temptation to keep out as many notes as possible for the sake of gain is very great ; and experience, which is the most conclusive of all teachers, has shown over and over again that banks have thus abused their credit, ruining their institutions and entailing great loss and suffering on the holders of their notes.

18. Again, it is contended that banks have grown wiser by experience and would exchange their notes for individual notes with more caution than they did form erly. This, unquestionably, would be the course of many banks ; but unfortunately, the banking system is no stronger than the weakest links ; and nothing is more certain than that in these days of feverish anxiety to make money, a class of men would invade the banking field, if such a system were adopted, and abuse the sys tem, issuing as many notes as possible without regard to their permanent value. They would expect to ruin the credit of their banks in a few years, but in the meantime make their fortunes, and having done this would be oblivious to the consequence of their conduct. The dan ger, then, is not from those who are in the banking busi ness, but from this new growth which would certainly spring up and curse the land with their rascality. In theory, the system of issuing notes on the security of merchandise, and thus endowing it with wings, is perfect; in practice, the paper circulation of the country would be ruined because of the inherent and persistent cussedness of a class which is ever watching for a chance to make a fortune regardless of principle, and the members of this class are more numerous and conscienceless than ever before in the nation's history.

credits for individual credits be adopted that shall pre vent soulless adventurers from engaging in the business and abusing it? 20. A well-considered plan is to raise or secure for the redemption of the notes of every bank that fails a fund to which every bank shall contribute. A fatal objec tion to this plan is, many banks would not be willing to contribute to the creation of such a fund. The work of creating and paying it to the note-holders of failed banks cannot be likened to the work of an insurance company. It indeed establishes a fund to indemnify the insured who suffer by fire, but if the house of a person insured is burned, can he always go to the insurer and get his money? Yes, if he has been honest and complies with the conditions of the insuring company. But if he has committed arson and burned his house, he cannot get one cent of insurance. Now, it is proposed that banks shall establish a safety fund, and while one of the num ber may be conducting its business in a most shameful and ruinous manner, speculating, discounting paper which competitors know will never be paid, they are not onl yhelpless, but indeed are sustaining it, by assuring the public that no matter how villainously it may be con ducting its affairs, its notes are perfectly safe, because a fund has been created, out of which they will be paid. The most conservative banks will long hesitate to join in creating a fund that can be thus perverted.

21. It would be quite another thing if a fund was created for the payment of losses honestly incurred and for errors in judgment, which are inevitable to the busi ness of banking; but it is not proposed to make any dis crimination in its use ; it is to be paid absolutely, in the event of a failed bank, to the holders of its notes. As ex perience has shown that rascals are in the banking busi ness, bankers who act conservatively and who are willing to pay for their losses, but not for the losses of others, would be disinclined to become contributors to the fund.

22. Again, if an automatic, self-regulating bank cur rency was established by State authority, whi'e many of the banks would probably establish conservative systems of banking, the cunning ones would succeed in some of the forty-five States in establishing looser systems of banking, by which, for a time, they would thrive and make money. They would expect that their notes would

mingle in the general mass of paper circulation, and that the people, who have been in the habit of examining them, would not discriminate between one note and an other. Before the people had found out the difference, and separated the tares from the wheat, the issuers would have made their fortunes, and be ready to laugh at their victims.

23. It is said that if banks returned to State systems their circulation would be essentially local, and there would be no danger of imposing on the people. This is precisely what would not happen. When the National banking system was first established many banks, fearing that their notes, if circulating in their own vicinity, would be presented for redemption (although only United States notes could be obtained in exchange for them), arranged with other banks for an exchange. The officer of an Eastern bank would exchange its notes with those of a bank in the West. So a large portion of the Na tional bank circulation in the East consisted of the notes of Western banks ; while in the West the circulation con sisted largely of the notes of Eastern banks. Many won dered how so many notes had become waifs on the great sea of circulation. They had not been carried by the ordinary winds of trade ; but had been artificially trans ported by the express companies.

24. If the State bank systems were resumed, notes would doubtless be exchanged in the same way. Banks would speedily arrange with each other for their ex change, to prevent their convenient redemption. The cunning ones, who expect to make their millions by the adoption of the system, would readily invent ways, not only of issuing their notes, but of keeping them away from their counters for redemption. This they could do easily enough for a time until others found out how their business was conducted.

25. If, however, a return is ever made to State bank ing, two or three things ought to be done. First, the notes issued by State banks ought to be made so very different in form, color, and design from the various kinds now circulating, that all except blind persons could easily understand that a new kind of note had come into the world. If this was not done, the ignorance of the people is so dense concerning the kinds of notes now in circulation that they would not discriminate between the new and the old. Many who are now clamoring for a return to State banking well understand the enormous advantages arising from the perfect faith of the people in every kind of note in circulation, and from their inability to discriminate between them and others that might be added to the list. As a bank-note or Government note circulates as well in one place as in another, and the peo ple rarely read them, opportunities to swindle the people by passing off poorer notes on them would be great. No wonder that the reapers are longing to enter the field, for it is dead ripe for their operations. The field was never so fully prepared, by reason of the excellence of the present circulation, for perpetrating this colossal fraud.

26. Again, the State ought not to supervise the work of such institutions. This would be a blunder of the first magnitude. The examinations now conducted are bad enough, but they would be still less trustworthy were this additional function undertaken. A badly managed bank would endeavor, if possible, to control the examiner and to blind his eyes. That would be one of the first and most indispensable steps in the process of issuing notes. False returns of the quantity issued would be one of the most common frauds. The approval or the ignorance of the bank examiner would be one of the most desirable ends in banking. The public, therefore, ought to be warned of the dangers of this system, and the State ought to take no part nor lot in superintending the banks conducting this business. The people have had all the bank supervision they can stand; it would be a mockery to carry it further. If the people wish to give banks authority to furnish them with a currency, then let them take care of it, and be responsible for it. For the bank examiners would certainly prove quite incompetent to extend their examinations in this direction ; it would be easier to fool or deceive a bank examiner with respect to a bank's issue than about anything else. Whatever laws might be passed, it would be quite impossible to prevent banks in some of the forty-five States from issuing notes outside any regular authority ; and so we repeat that the State should keep its hands entirely off this business.

27. These are some of the reasons why State bank notes should not be issued ; but if they are, ought the States to prop up their value by supervision which can not be efficiently executed ? 28. What, then, should be done? Evidently a way must be provided to pay depositors quickly whenever large sums are suddenly demanded. These occasions come unbidden and are always unwelcome. Now, bank ers can pursue only one course, cut off loans entirely or reduce them to the narrowest possible limits in order to accumulate funds to pay their depositors. In the autumn of 1896 depositors began to draw out very quietly their deposits and put them away to be prepared for any turn in events if Mr. Bryan were elected President. Bank ers became alarmed, they could not predict the extent of the movement. What was the consequence? Unwilling to lend, the rates of interest advanced to a high figure. As soon as the hoarding movement ended and depositors began to return their money, the fear of bankers passed away, and rates of interest quickly fell to their old level.

29. The fears of bankers are always aroused when ever such movements are impending, or are in progress among their depositors. How shall these emergencies be met? We all know how they are by the Bank of Eng land. It has a fixed circulation, in some respects like ours, which cannot be quickly expanded without violat ing the law. On four occasions the bank has either dis regarded this or announced its intention of doing so. And the issuing of a small amount was sufficient to allay the fears of all.

30. When the Bank of Berlin was reorganized in 1875, a wiser plan was adopted. It was permitted to issue more notes on adequate security by paying a tax at the rate of 5 per cent. while they remained in circula tion. The tax was intended to be high enough to pre vent the bank from making money by thus expanding its circulation, and to induce it to withdraw the excess as soon as the emergency for issuing it was over.

31. This plan is highly successful. On several occa sions the bank has applied for an increase of issue, which has been readily granted. The notes have been put in circulation, remaining there for varying periods, and then withdrawn. By this system there is no danger of a money famine, for the bank can always obtain additional notes on the deposit of proper security. On the other hand, the tax is high enough to keep down the tempta tion to issue more than are really needed, because no profit can be made by expanding the circulation, beyond the regular amount.

32. In this plan may be seen a wise move, we think, for expanding the circulation of our banks on extraordi nary occasions. Endow the clearing-houses composed of twenty or more banks with authority to issue addi tional notes on the deposit of proper security, consisting, perhaps, of its discounted paper. If this be thought too risky, prescribe a list of bonds and stocks that may be thus used. Add to this security perhaps the joint liability of all the banks for their payment. For the privilege of doing this require the banks applying for an increase to pay a tax at least equal, if not considerably exceeding, the legal amount of interest prevailing in the State where the bank is located. At all events the rates should be high enough to prevent banks from getting an increase merely for money making purposes. If a bank could be fully trusted, the law might provide that all of the interest derived from such an increase should be taken by the Government as a tax for the privilege of issuing them. But whatever might be the amount of the tax, it should be high enough to restrain a bank from issuing or keeping notes in circulation longer than the occasion for their issue.

33. There might be added many suggestions and crit icisms of details concerning the plan of making emer gency issues. Perhaps an objector might require that the Government should prescribe a series of bonds and stocks to be taken as security ; for example, the stocks and bonds of all railways paying dividends, and the bonds of all municipalities paying interest. If such regu lations were made concerning the security to be taken, a bank would have no .difficulty in procuring them, as vast quantities are now in existence.

34. H such a plan was adopted, the fact that there was an effective method for obtaining an additional sup ply of notes would do much toward preventing the rise of occasions for their use. We should profit by English experience. The danger is intensified when there is no way of quickly expending the circulation. Provide an effective plan, whereby every depositor and borrower will feel assured that he can get funds whenever they are needed and deposits will no longer be withdrawn and hoarded, or borrowers resort to unusual methods to get money.

35. Any permanent increase of the currency, how ever large, affords no remedy whatever for such a con tingency. Double the currency, and business would soon accommodate itself to the additional amount, and the same danger of stringency or inability on the part of depositors to get their money would exist. What is needed is a quick method of safely expanding the circu lation whereby depositors can withdraw their deposits and borrowers be accommodated. The Bank of Berlin has provided an effective way—a way that we should fol low with such changes as our different surroundings and modes of doing business may require.

36. The banks ought not to wait until depositors are pressing for their deposits to take action. They should act now, while under a clear sky.

37. These are the two most important changes needed to perfect our National banking system. It is folly to suppose that we have not circulation enough to transact the business of the country. We have more in proportion to the amount of business transacted than any other great nation except France Great Britain is ing more business with less currency, yet no complaint is ever heard in that country of a lack of banking facili ties or of money.

38. Yet these amendments would not satisfy all. They believe that in some sections of the country the supply of money is inadequate, and that the present system of banking will remain imperfect until it provides, every where, for a larger monetary supply. It is true that there is but little money in some places ; this, however, does not prove that the Government, either State or National, has been unmindful of its duties. If the supply were greatly increased, would these barren places have more? All the places that have anything saleable are supplied. If there are places having grain and other products which they cannot sell because buyers have not the money, though having other property they would gladly give as security, then its scarcity would clearly appear, but this can never be shown merely from the fact that there is not a present supply. One person has never had any money or only a very small sum during his life ; another has had millions since his boyhood ; but the vary ing conditions of the two do not prove a scarcity of sup ply in the one case and an abundance in the other. Just what it proves is too evident to require statement. A proper test to apply is one's ability to get money for making a purchase when it possesses good credit, or property that he can give in exchange. When he can not get it under these conditions, he may truly conclude there is a scarcity. We do not think it can be shown that there is the slightest scarcity in any place to-day where persons have something to sell to purchasers, or to use as good security to lenders of money.

39. In 19oo two amendments were made to the act worthy of notice. One of these permitted banks to issue notes to the par value of their bonds held as security, an amendment long desired and reluctantly granted, though not a single intelligent objection has ever been presented against the change. Another amendment of more doubt ful worth permits the establishing of banks of $25,000 capital in places having less than three thousand inhab itants.

4o. One of the strong objections to this radical de parture is that evil-minded persons may be able to borrow that small sum, establish their bank, issue its notes, and with these pay off their lenders, and thus have no real capital to lend to anybody. To do this would be to revive the old wretched system of State banking, which the National system had so effectively killed.

41. The granting of the right to found such banks was deemed preferable to granting the large banks in the principal cities the right to create branches. The two United States banks had branches, and a few State banks with branches were organized and conducted in a similar manner. For a long period, however, branch banking has been unknown in this country. In Canada and Eng land and Continental countries branch banking has long existed. This method of banking has been discussed of late years and is growing in popular favor. One strong reason for creating them is the belief that fresh capital will be drawn by them into places where they are or ganized, while the establishing of new banks in such places would have the effect simply of drawing together the capital already existing in them. In other words, branch banking is an admirable system for dispersing more generally the capital existing in a country. It is more equalized than it would be through the creation of even a large number of additional independent banks. Furthermore, branch banking is the better system be cause the managers would he sent and supervised by the parent bank, and in many cases would have more expe rience than the managers of small independent banks.

42. If these modifications of our National banking law should prove to be inadequate to meet the wants of the country, a new plan might be adopted based on the following considerations: Negotiability may be given to the various products of the earth by the use of a nego tiable representative, like the iron-warrants issued by the English manufacturers of iron. By this system the iron assumes a truly negotiable character; the manufacturers are relieved of their products as soon as their warrants are issued and put in circulation, and they are in the re ceipt of money wherewith to continue business. Cannot the same idea be introduced or extended to other prod ucts, and their producers be relieved of the burden which many of them are often quite unable to bear? Indeed, it has been proposed that iron and cotton should be stored for the purpose of issuing warrants against them, to be sold, or used as security for loans, or taken in payment for debts. What now prevents farmers, cotton planters, iron manufacturers and all other producers of commod ities from perfecting their plans for storing their produce and issuing certificates for such quantities as may be thought most expedient, and putting them into circu lation? By so doing they would add wings to their products. Would they not circulate? Why ought they not to be as readily received as bank notes issued by a bank on the security of the same of produce, specified in the note? For one to refuse such certifi cates, though willing to accept the notes of a bank rep resenting precisely the same thing, would be to act with "a wisdom not according to knowledge." 43. It may be asked, Could not frauds be easily per petrated with these certificates? Certainly, but so they can be with an extensive bank note circulation based on the produce of the country.

44. Another mode is suggested. Suppose a farmer's grain was stored in a manner satisfactory to a bank, and that his notes were issued for small amounts, say ten dol lars, bearing a rate of interest that could be easily calcu lated, and guaranteed by the bank and payble by it on demand. Besides the borrower's liability for the principal and interest, he would give the bank some compensation for its guaranty. Would not such notes circulate? At first, they would probably circulate without any thought of the payment of interest, but the longer they ran, the greater would be the accumulation of interest until the arrival of a period at which the interest would be exacted by the persons parting with them to new holders. After awhile the notes would get back to the issuing bank, and payment be demanded. In this way they would cease to circulate.

45. Two obvious advantages would flow from such a system. First, the money needed by borrowers could be easily obtained. Their power to borrow would be limited only by the property pledged for their redemp tion. In other words, all products and other property might be converted into a negotiable form. Under such a system even real estate might become negotiable. Sec ond, to get the interest accumulating on the notes would be an inducement to present them for payment. Else where we have shown the dangers of attempting to issue ordinary bank notes. Thus a strong motive would be created for retiring them.

46. The weakest element in the plan would be to protect holders from loss. Would there not be danger of over-issue? If banks guaranteed them on poor security and borrowers were unable to pay them, holders might suffer. As every one knows, there is no danger con cerning the security of the notes that are now issued. If the system were thus enlarged the security of the notes would 'be lessened. Many restrictions would be needful, and at best there would be more risk attending the crea tion of such a circulation.

47. It may be asked, Why not permit banks to issue their own notes bearing interest, and make such terms as they please with borrowers? Would not borrowers be accommodated quite as effectively and the return of the notes be as fully secured? Perhaps so; either mode of issuing them is, we think, worthy of consideration. Of course, from the banker's point of view there would be a strong objection to both schemes, the payment of interest to holders, which would lessen bank profits. But as note holders would run some risk of their non payment, why should they not be paid something for their risk? 48. Finally, in our opinion, neither plan, nor any other for State or private issues, ought to be adopted until it is clearly evident that the extension of the present system in the manner proposed is inadequate to meet the legitimate demands of the people.

'See article by A. D. Noyes, "The Banks. and the Panic of 1893," 9 Polit. Science, 2, 12; "The Banks and the Currency question," 46 Bank Mag., 169, Sep., 1891.

view is more generally entertained by bankers than the view expressed in the text. It was felicitously developed by the late George S. Coe, Pres. of the Am. Ex. National Bank of New York, in addresses at conventions of the Am, Bankers* Assn. Proceedings, 1879. 38; 1881, 29; 1882, 5; 1891, 43. A plan was reported and adopted, based on this idea at the Baltimore Con vention of 1894. See remarks of the Nation thereon, Vol. 59, 300. Numerous papers have been read at the conventions of State Bankers' Associations on this subject, which appear in their reports. The ablest advocate of this view is Horace White, National and State Banks, 3 Annals of Am. Acad., 529; his ad dress on "An Elastic Currency," Proceedings of Am. Bankers' Assn., 1893, 58, and his work on "Money and Banking." See also articles on "Money and Bank Cedits," H. W. Williams, 5 Annals of Am. Acad. 531; "Deposits as Currency," C. F. Dunbar, 1 Quar. Jour. of Economies, 401, and "The Bank Note Question," 7 Id. 55; "The National Currency," 59 Nation, 420; Chairman Springer on Banking, 57 Id., 404; "American Banking and Money Supply of the Future," 3 Annals of Am. Acad., 559; "Practical Suggestions for Currency Legislation," by various writers, 15 Rev, of Rev., 45; articles on "The Financial Muddle," by J. S. Norton, W. M. Springer and H. W. Cannon, 160 N. Am. Rev., 129.

banks, bank, notes, money and circulation