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months may be struck. The tax formerly levied by the United
States upon deposits also brought into the Treasury returns from
all banks and trust companies doing business under the laws of
the several States and from private bankers, which may fairly be
taken as accurate down to November, 1882, when the repeal of
the tax put an end to the series. Since that date, moreover, the
successive comptrollers have obtained from official sources such
information as could be had respecting state banks and trust com-
panies ; and this, although imperfect and not given for uniform
dates, is an approximation to the actual movement down to the
present time. Of the reported deposits of trust companies only a
small proportion represent the trusts held by these companies ; but
by far the greater part belongs to the banking business, which is
their chief function. And, although the action of parts of their
deposit accounts may be sluggish from their methods of deahng
with customers, — as is also true in some degree of any bank,
national or state, — it seems not unfair on the whole to let these
deposits stand on the same footing as those of the ordinary banks,
especially in view of the probability that the figures are within
rather than beyond the truth. Unfortunately, there are no longer
the means of determining the amount of the deposits with private
banks and bankers; it was probably not overstated before 1883,
and it can only be said that the amount, if it could be known, would
probably show that the increase observed down to that date has
continued since. Taking then, for comparison, the six months'
averages which the Comptroller's reports give for the banks other



cree un concurrent au billet de banque, il est vrai, mais un concurrent bien faible ; quel
stimulant a deposer des especes en compte courant h la Banque, si on ne vous sert aucun
interSt ? " " Histoire des Banques en France," p. 241. Wagner, in his article in Schon-
berg's " Handbuch " on " Credit und Bankwesen," has some important remarks on the
origin of " book-credit deposits " and their use as a real substitute for notes. See §§ 54-
57. Knies, in "Geld und Credit," fails to reach any clear conception of the function
of deposits.



1/8



ESSAYS



than national, the figures from these sources may be grouped as
shown in the following table : —

[In dollars, 000,000 omitted.]



Average for 6 months ending
November 30, 1875
May 31, 1876
May 31, 1877

May 31, 1878
May 31, 1879 .
May 31, 1880
May 31, 1881
May 31, 1882
November 30, 1882
For year 1883 . .

1884 ....

1885 ....
1886

Amount on March 3, 1887



Notes



Nat.
Banks



308

301

304
321

309
321
312

311

292
271
242
186



Deposits



Nat.
Banks



675
617
640

611
614

799
989
1,047
1,095
1,054
1,010
1,071
1,146
1,225



State
Banks



Trust
Cos.



487
480



230

257

319
386

452
490



335
325
344
343



165
189
188
214



Priv.
Bankers



140

183

242
296
289

?

?

?

?



Aggre-
gate



1,162
1,097
I, III

1,025
1,011
1,301
1,617

1,795
1,874

[1554]
[1524]
[1603]

[1703]



There can be little doubt, then, that in 1886 the aggregate
deposits of banks and bankers in the United States, savings banks
being of course excluded, were on the average above two thousand
millions ; and there may be said to be a high degree of probability
that at the present time the aggregate stands at nearly double the
amount which was returned for 1875. The increase has not been
without interruption. The total has fallen in periods of depres-
sion, and it has risen with regaining confidence. Indeed, the
changes in the business situation of the country, acting through
the demands of persons dealing with the banks, of necessity
leave at this point a permanent record of their passage. But
the fact which it is chiefly desired to emphasize here is the com-
plete elasticity of this section of our currency. It adapts itself to
the demand of the moment without visible effort and either by
expansion or contraction, as the case may be ; and it does this
quite irrespective of legislative purpose or guidance. From the



DEPOSITS AS CURRENCY 1 79

figures, indeed, the conclusion is irresistible that, if for any reason
the creation of deposit currency through the agency of the national
banks is hindered or limited, it will make its growth by means of
state banks ; and, if not by these, then by a system of private
banking, which no legislation can touch, until the government
shall assume the power of declaring whether A may owe B or not.
The growth of this kind of credit may be guided and it may be
made more or less sound according to the wisdom of legislation.
The stability of the standard to which its value relates is wholly
within legislative control, and the continuity of the test of its sol-
vency by reference to that standard is within the scope of legisla-
tive influence. But, whether the legislation be good or bad, here
is the adjustable part of our system of credit currency, and the
part of it which will continue to adjust itself to the scale of the
transactions to which current business naturally gives rise.

In view of the extraordinary growth of this kind of credit
currency, the mere question of the amount of national bank-notes
in circulation sinks into insignificance, and with it the question
whether their place must be made good by other descriptions of
paper, as, for example, by greenbacks. There is a real question
as to the convenience of using coin, in place of a part of the paper
which the community uses in its small transactions ; there is a
question as to the wisdom of depriving a great system of banks of
the ability to supply whichever form of credit may be required by
the public ; and there is a grave question as to having any larger
part of our credit currency, or any part of it, subject to control
as regards its amount, by any legislative body whatever. But as
regards the mere question of contraction, still sometimes brought
forward with respect to the paper currency, the grounds for it
have ceased to exist. For, besides the fact that since resumption
specie has come in and must continue to come, through an ever
open door, to make good any deficiency of circulating medium, the
growth of deposits has covered many times over all loss in the
amount of paper circulation. In fact, as soon as specie payments
were firmly established and the value of credit currency was set-
tled, by its assured conversion at pleasure into a solid medium, con-
traction ceased to be any proper object of dread. Indeed, we may
go farther, and say that if the United States government were to
pay off every legal tender note, and if every bank-note were to



l8o ESSAYS

be withdrawn, these changes would produce no real contraction of
the currency. With specie thus brought into common use for
smaller and everyday transactions, we should, it is true, have a
currency far less convenient for its minor uses, and we should
no doubt see the use of the deposit and check system thus carried
prematurely into classes of transactions and into sections of coun-
try where the note now meets a popular demand ; but, as regards
the mass of exchanges from which the business condition of the
country at any given time takes its tone, we should find chem car-
ried on as now, by a creation of bank credits on whatever scale
the needs of the time might require.

Upon this point sufficient evidence is presented by the opera-
tions of the national banks since the resumption of specie pay-
ment. Of these operations, the great results are clearly shown
in the diagram issued with the comptroller's report for 1886.
Inspection of this diagram shows an enormous expansion of the
general scale of transactions by the banks since 1879. This ex-
pansion has come only in a moderate degree from the applica-
tion of new banking capital ; it has come in spite of the sinking
of the line which describes the changes in circulation, and chiefly
from the sharp rise of the line of deposits during the flush period
from April, 1879, to December, 1881, and again from the fall of
1884 to the present time. The elastic power of the deposit cur-
rency, and the certainty with which it iills the void left by the
disappearance of paper, could not be illustrated better than by the
soaring of the red line as the black one sinks, upon Mr. Tren-
holm's chart.

The legitimate inference from these considerations is not, how-
ever, that the disappearance of the bank-note, or the substitution
of government paper for it, is to be viewed with indifference.
The business of a country in which the banking habit is firmly
seated will, it is true, find a medium of exchange, and in the
amount needed ; but it is of great consequence that the medium
used should be made up of the kinds most convenient for the use
of the community, and divided between those kinds in the pro-
portions most convenient. This question of proportion is one
which no combination of counsellors, public or private, can deter-
mine. No legislature and no conclave of bankers can say that



DEPOSITS AS CURRENCY l8l

the people of the United States require any given amount of notes
for the management of their exchanges. The amount which is
sufficient this year may, and almost certainly will, be either insuf-
ficient or in excess the next ; and it is partly from a sense of the
absolute inability of any human foresight to deal with this prob-
lem, that we owe the multitude of schemes proposed in years past
" to adapt the amount of the [paper] currency to the needs of
the country." ^

Left to itself, the country settles this problem of proportion
in a natural way, by the demand which each individual using a
credit currency of any kind will make for notes or for a deposit
account, as his special conditions may require. But, in order that
this natural process should go on easily and without inconvenience
to the community, it is requisite that the banks or bankers with
whom individuals deal when obtaining loans or receiving payments
should have the ability to respond to demand in either form ; in
other words, that the creditor of the bank or banker should be
able to receive the evidence of his claim in the one form, if he
expects to use it in large operations or in a closely settled com-
munity, or in the other, if in small operations or where hand-to-
hand dealings are the rule, and that the lender should find his
profit equally in responding to either demand. It is only by
being allowed to take one or the other form, as occasion requires,
that a given mass of bank credit can perform its functions with
the maximum of public advantage. There may be sound reasons
of a different order for not giving the power of issue in both forms
to every company or individual carrying on the business of bank-
ing ; in other words, the ideal of a perfectly free system of
banking is no doubt beyond reach ; but that, for the greatest
advantage of the public, the issue of notes by banks should be
widely enough diffused to present in every considerable district
which uses banking facilities at all the easy choice between the
two methods of using credit, seems to be beyond dispute. This
choice is given only when the power of issue is substantially in

1 It is true that there is a party who believe that the issue of notes for the country
should be fixed and " have no elastic power." See Mr. Buckner's speech in the House
on the extension of bank charters, April 17, 1882. And a Secretary of the Treasury once
committed himself to the astonishing proposition, that the issue of bank-notes ought to
be fixed in amount and the issue of legal tenders adjustable by the Treasury, according
to its conception of the needs of the time. See Finance Report, 1872, p. xx.



1 82 ESSAYS

the same hands which control the loans and the business of bank-
ing generally. It is, in fact, one of the great services rendered
by the national banking system that, for a most critical quarter
century, it carried note issue and deposit banking side by side
throughout the greater part of the country, under the manage-
ment of a class of remarkably sound institutions, giving to the
community many of the benefits of free banking with the mini-
mum of its risks. As a substitute for this system, the issue of
notes by the Treasury is as little to the purpose as the striking of
coins' by the mint ; nor is there any machinery by which the oper-
ations of the Treasury can be made to perform the desired office.
Happily, those operations are quite distinct from the commercial
movement of the country, and are unsuited by their nature for
any closer connection with it, even if such connection were expe-
dient.

To the firm establishment of the right of note issue as a prac-
tical alternative given to the banking system of the country, it is
doubtful whether any serious opposition would have arisen had
there not been an impression that in some way this right is the
opportunity, either for an exorbitant profit or, at any rate, for a
profit which should be reaped by the government. As regards
the amount of the profit coming from circulation, no real answer
has ever been made to the computations by which the late Comp-
troller repeatedly demonstrated in his reports the trifling margin
of gain left by the use of credit in this form. Whatever may
have been the profits of banks from this source fifteen years ago,
with the rates of interest then prevailing, there is no doubt as to
the comparative unimportance to-day of using their credit in a
form which requires as a preliminary the investment of capital
at the rate of two and one-half per cent. Indeed, the figures show
that, by jealously maintaining the primitive forms of the national
system under altered conditions, note circulation has long been
systematically discouraged and its essential advantages for the
public sacrificed.

To every practical demonstration of the narrow margin of
profit, however, the common reply is, after all, a more or less open
appeal to the theory of a supposed double source of profit under
a secured issue — a theory which has had a strong hold on the
public, and has not always been met with complete perception of



DEPOSITS AS CURRENCY 183

its hollowness, even by the friends of the national system. For
the present purpose it is enough to point out that the source of
profit for any bank is the investments in securities or loans which
it can hold, by the use of its capital, together with its credit in any
form ; that its profit is not increased by pledging any part of the
investment to secure any class of liabilities ; and that, therefore,
the sources of profit open to national banks issuing notes are of
precisely the same order as those enjoyed by state banks and
private bankers. The national bank has the great advantage of
a choice between methods of using its credit ; but, however its
choice is made, its investment is necessarily measured by its capi-
tal phis its credit, which is also the measure for its non-issuing
neighbors. The confinement of the national banks therefore to
the use of credit in one form, instead of giving them an alternative
between two, would not cut off a double profit now enjoyed, but
would merely require that the credit by which a part of their
profit is earned should be evidenced by book account, and not by
demand note, or vice versa. In short, the profits of the banks are
increased by the right of issue only so far as that right makes it
possible to extend the credit of the banks, and so to increase their
holding of investments, beyond the point which they could reach
by the use of the deposit system alone. But the swift extension of
deposits already pointed out makes it extremely doubtful whether
the extinction of the note issues would now have any serious ef-
fect on the total amount of bank credit used or any practical result
other than a certain inconvenience to the public. Barring the
effect on some of the smaller interior banks, the probability is
that the national banks in the aggregate would, even without the
right of issuing notes, continue to expand their business and to
earn such dividends as the current rate of interest would have
allowed in any case. This is the natural inference from the fact,
already noted, that hitherto the displacement of their notes has
been far more than made good by the increase of deposit accounts.
That the government makes a saving by the issue of its own
notes, so far as these are the substitute for an interest-bearing debt,
and that it might make a still larger saving by occupying the whole
field of paper circulation, is an independent consideration. It is,
however, plainly a consideration of very little practical value, when
we take into account the ease with which ordinary sources of in-



l84 ESSAYS

come enable the government to reduce its debt as well as meet its
expenditure, and the fact that the disposition of a surplus revenue
has been so far an insoluble problem. Obviously, the government
of the United States can afford to settle the currency of the coun-
try upon whatever basis is found to be for the convenience and ad-
vantage of the public, without being diverted from this aim by any
necessity for securing a certain number of millions. It is conceiv-
able that other functions now left to private enterprise might at a
pinch be assumed by the Treasury and made to produce a revenue ;
but few persons would pretend that there is any fiscal reason which
could be of weight in favor of such an assumption, if it appears
that the general interest is in any way promoted by leaving the
service to individuals. Economy at any cost is not our rule in
dealing with other subjects, and there is no reason why it should
be a controlling consideration in the regulation of any part of our
currency.

Assuming, then, that the profits of note circulation are but the
ordinary profits of bank credit, such as will be earned under what-
ever system may finally prevail, and assuming also that the govern-
ment can afford to forego the use of its credit in the form of notes,
and to allow the banks to continue and extend the use of theirs, the
question as to our banking system resolves itself into the inquiry,
whether it is for the interest of the public to keep deposit bank-
ing as far as possible under the national system, or to allow it to
drift more and more into the possession of state banks or into pri-
vate hands. The optional use of the right of circulation being re-
moved, not much is required, it would seem, to turn the scale as
between a national charter, on the one hand, with its numerous
safeguards and its strict public supervision, and a state charter, on
the other, with its frequent absence of all limitations — to say
nothing of the complete Hcense of private banking. The fact of
the existence of nine hundred state banks and of thirty-six hundred
private banking-houses is evidence on this point. " It is doubtful,"
says Mr. Trenholm, " whether the banks would find sufficient in-
ducement to remain in the system without enjoying some privileges
as to the issue of currency."

The doubt whether there is power under the Constitution to
charter banks except in connection with an issue of notes may
probably be dismissed ; but not so the doubt whether banks would



DEPOSITS AS CURRENCY 1 85

care to hold national charters if the power of note-issue were with-
drawn. For here the comparative soundness and safety of the
whole of our credit currency come into question, and we have to
ask, What is the safest system for its more important as well as its
minor element ? If there is reason for demanding that the cur-
rency used in the small transactions of the community shall be
secure, there is also reason for requiring that the greater currency
used in large transactions shall be secure. That complete super-
vision of the latter is impossible from the nature of the case does
not affect the result : it is still for the advantage of all that as
large a proportion as possible of the sources of our real currency
should be kept under that organization which practically is found
to insure the best oversight and the safest management. There is
no doubt as to which organization that is. The conclusion seems,
then, to be irresistible that, if the national system can retain its
control over twelve hundred millions of deposits, as the figures now
stand, and perhaps extend its control over a part of the eight or
ten hundred millions held elsewhere, the community would buy
this result cheaply by allowing the issue of such proportion of
bank-notes as this mass of business would imply. The risk of
inflation from overissue would not be a serious element in the ac-
count. It would not be appreciably greater than at present ; for,
after all, inflation is as easy and, under favoring conditions, occurs
as surely with a system of pure deposit as with a note system, as
the operations of our own banks in any period of excitement may
testify. And, in any case, the security against the consequences
of inflation is not to be found in the limitation or extinction of
notes, but in specie redemption for all liabilities, and in the encour-
agement given to sound banking by steady oversight and pub-
licity. Such security, it may be presumed, we shall continue to
have under the national system in as great a measure as at
present.

The kernel of the banking question for the United States, then,
as it seems to the writer, is to be found in the future of the deposit
system. If this is settled upon the best plan practicable, the sub-
stance of the question will have been disposed of ; and, for the
purpose of such settlement, the continuance or perhaps it should
be said the revival, of the right of issue might well be allowed as a
makeweight. It is not within the scope of this paper to discuss



1 86 ESSAYS

the various propositions for meeting the practical difficulty arising
from the extinction of the national debt. It may be said of these
propositions in general, however, that they are expedients for pro-
longing the existence of the national bank-note issue for such time
as any part of the national debt may remain unpaid, postponing
the main question, which must present itself with the disappear-
ance of the debt. In this part of the discussion, as in others, the
impression created by the success with which the present secured
circulation has worked is so great, that it is hard to bear in mind
that, after all, the kind of security held is not of the essence of the
system. Evidently, the fundamental point is that the notes shall
be secured by a preferred claim upon some sufficient portion of the
property of the issuing bank. This portion of property, now re-
quired to consist of United States bonds, may, however, equally
well consist of other securities of assured value. It is, indeed, en-
tirely conceivable, so far as the principle of the system is concerned,
that here, as in Germany, a solid circulation might be issued, of
which the basis should be those general securities and commercial
obligations of short date, which are found sufficient to guard the
credit of a bank with its own customers and the public. In short,
if we once recognize the fact that the particular set of details
which have marked our system so far are obsolescent, the market
is not without securities and the world is not without examples, on
which a substituted system of circulation could be safely estab-
lished.

It would no doubt be difficult to arrange a plan for securing
notes as simple and perfect in its operation as that which the
existence of a great public debt has given us the enjoyment of
since the Civil War ; but the actual difference to the public, if a new
basis of security were to be sought, would probably not be appre-
ciable. We are apt to underrate the extent to which the liabili-
ties of the national banks are protected by the general safeguards
of the system, as distinguished from the specific pledge of securities.
The deposit accounts of these banks, however, arc secured only by
the strength of the motives which usually prompt directors to
prefer good investments to bad. And it appears that, with an
average of such deposits of over one thousand millions for the last
five years, the loss to depositors has been less than one-fifth of
one per cent, not of the movement, but of the average hold-



DEPOSITS AS CURRENCY 18/

ing.^ A loss, then, which is hardly greater than the mere unnoticed
abrasion of some large classes of coin circulation, measures the
risk in practice of what would be called an entirely uncovered



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