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liability, under a well-organized system like the present. It is to
the reduction of a fractional loss like this upon the note circulation
that the machinery of any system of pledged securities is directed.
To find a working plan which can be used with practical safety
within such limits cannot be a hard task for legislative ingenuity.

^ Down to September, 1886, the proved claims against insolvent national banks
since 1863 amounted to $44,236,247, on which $22,508,900 had been paid. The last
five years of the period were the worst, including the heavy failures of the Mechanics'
National Bank of Newark, the Pacific of Boston, the Marine of New York, and the
Exchange of Norfolk, which amounted to more than $12,500,000. For the five years
the proved liabilities of insolvent banks, including these four, were $17,047,245, on which
$7,343,000 has been paid. The average loss of the five worst years, then, has been less
than $2,000,000, or less than one-fifth of one per cent of the deposits.



THE BANK-NOTE QUESTION i

The question as to the continued existence of bank-notes as a
part of the currency of the United States has recently entered
upon a new phase. For several years past the majority of our
people and of their political representatives have observed with
great equanimity the gradual disappearance of national-bank notes,
and the approach to the point where the trifling profits upon circu-
lation and the extinction of the national bonded debt would leave
no paper in use except the notes and coin certificates of the United
States. This surrender of the whole field to government paper,
the result of circumstances, but not designed by law, has been
defended, moreover, on the ground that the national Treasury
ought to receive whatever profits or convenience may be secured
from the issue of credit as a substitute for money, and that the
right of issue granted to corporations of any class is an unreason-
able addition to their many privileges. We now have the propo-
sition repeatedly brought forward in Congress, discussed and
supported in the public press, and embodied in the platform of one
of the great political parties, to repeal the tax of ten per cent on
the notes of banks and bankers carrying on business under the
laws of the several states, and thus to admit to the field of circula-
tion the issues of a vast number and variety of local institutions,
which have been excluded therefrom by the practice of the last
twenty-five years. In short, the present form of the bank-note
question appears to be, not whether the whole right of issue shall
lapse into the hands of the national government, but whether that
right may not advantageously be extended to everybody whose
exercise of it is admitted by the varying policy of forty-four local
legislatures.^

1 Quarterly Journal of Economics, October, 1892.

2 Dills for aholishinfT the tax on notes of state banks, or for equalizing taxation on
the notes of national banks and of state banks, have been introduced : —

188



THE BANK-NOTE QUESTION



189



A sudden change of ground like this, involving a proposed
revolution in our system of paper currency and in much besides,
may betoken a decisive and durable alteration in the lines on which
the bank-note question is to be discussed hereafter ; or it may only
be one more instance of the facihty with which large numbers of
our people are ready for a brief space to seize upon the last new
idea, — especially in matters of finance. That the idea is now to
be found in a political platform, we are warranted in saying, proves
nothing, except that in the judgment of some persons it has a
present hold upon some important classes or sections, and is likely
to retain that hold until November. But, whether durable or tran-
sient, the change of ground is too important to be neglected. In
either case, it probably has its origin in real wants felt keenly in
some parts of the country, though perhaps misunderstood. And
in either case it is interesting to inquire whether the remedy pro-
posed is safe and appropriate to those wants.

The legislation under which banks are now organized under
state authority is, in some cases, the same that was in force prior
to the establishment of the national system, in some cases has been
revised, and in others is of quite recent origin. In some cases, —
as, for instance, in some of the New England states and in New
York, — it is extremely elaborate ; and in others, as in Missouri,
Virginia, and parts of the Northwest, it enters into comparatively
few details. In some cases, the grant of powers is wide enough to
cover all banking functions, including issue, and in some it will be

H.R., by Mr. Henderson, N. Car.
H.R., by Mr. Dibble, S. Car.
H.R., by Mr. Richardson, Tenn.
Sen., by Mr. George, Miss.
H.R., by Mr. Bland, Mo.
H.R., by Mr. Wheeler, Ala.
Sen., by Mr. George, Miss.
H.R., by Mr. Richardson, Tenn.
H.R., by Mr. Bland, Mo.
H.R., by Mr. McMillin, Tenn.
H.R., by Mr. Cox, Tenn.
H.R., by Mr. Breckinridge, Ark,
H.R., by Mr. Harter, Ohio.
H.R., by Mr. Harter, Ohio.
H.R., by Mr. Harter, Ohio.
Sen., by Mr. Vance, N. Car.
Sen., by Mr. Harris, Tenn.



1875.


H.R.,


by Mr. Riddle, Tenn.


1889


1876.


H.R.


by Mr. Atkins, Tenn.


1889


1876.


H.R.


by Mr. Roberts, Md.


1889


1876.


H.R.


by Mr. Riddle, Tenn.


1891


1879.


H.R.


by Mr. Vance, N. Car.


1891


1879.


H.R.


by Mr. Buckner, Mo.


1891


1879.


H.R.


by Mr. Davis, N. Car.


1892


1882.


H.R.


by Mr. Gibson, Ga.


1892


1882.


H.R.


by Mr. Hutchins, N.Y.


1892


1884.


H.R.


by Mr. Dibble, S. Car.


1892


1886.


H.R.


by Mr. Chandler, Ga.


1892


1886.


H.R.


by Mr. Dibble, S. Car.


1892


1886.


H.R.


by Mr. Bennett, N. Car.


1892


1888.


H.R.


by Mr. Dibble, S. Car.


1892


1888.


H.R.


by Mr. Chandler, Ga.


1892


1889.


Sen.,


by Mr. Vance, N. Car.


1892


1889.


H.R.


, by Mr. Chandler, Ga.


1892



19©



ESSAYS



found that in the revision of statutes in the last generation the
issue of notes has been prohibited. The provisions for regulating
the operations of banks vary, from cases like that of Massachusetts,
which maintains some restrictions so severe as to prevent the
organization of any banks at all under state law, to such cases as
that of New York, where a thoroughly organized state system is
able to meet the national system at times on something like equal
terms. Some cf the states have their banking departments fully
organized for the purpose of supervision : others have no organiza-
tion beyond the requirement of returns to be made to the auditor
or some other officer of the state. The provisions for returns and
for publicity of operations are generally imperfect, and far below
the standard of the national system, many states being content
with an annual statement only.

The distribution of state banks under these circumstances is
extremely irregular. In some states none exist : in others they
are strong, and their number is rapidly increasing. But, if we take
the statements collected and published annually by the Comptroller
of the Currency, we shall find that their great strength is in the
group of Northwestern states, in two or three states of the centre,
and in a few of the South Atlantic and Gulf States.^ It will also
appear, that the capital of the state banks is not proportional
to their numbers, but shows a much lower average per bank than
the capital under the national banking system. This is due in
part to the general though not universal preference of large city
banks for organization under the national system, and also in part

1 Of the 2572 state banks covered by the Report of the Comptroller of the Currency
for 1891, two-thirds may be grouped as follows: —

Wisconsin 91 Virginia 93

Iowa 122 N. Carolina 29

Minnesota 93 S. Carolina 19

Missouri 401 Georgia 34

Kansas 134 Kentucky 151

Nebraska 356 Tennessee 64

N. Dakota 5 1 Mississippi 54

S. Dakota 65

1313 444

New York has 176, Pennsylvania 84, California 144, and the group Ohio, Indiana,
Illinois, and Michigan have 196. The remaining 22 states have 215 in all. This
account does not include loan and trust companies.



THE BANK-NOTE QUESTION



191



to the great number of banks with small capital organized under
state laws. The minimum of capital allowed by the national
banking system being $50,000, the state systems in many cases set
the minimum at $25,000, as in New York and Iowa; in others as
low as $10,000, as in Missouri; and in some cases even as low as
$5000, as in Nebraska, Kansas, and the Dakotas. For the organi-
zation of banks with feeble capital, therefore, whether this is the
result of inabiUty to provide more or of limited employment for
capital in the particular locality, the state laws often give an
opportunity not allowed by the national system. That the demand
for the establishment of small banks is increasing, especially in the
West and South, is clear from the recent legislation of the states,
and from the marked increase in the number of banks organized
under state law.^

1 The following table, made up from the reports of the Comptroller of the Currency,
is intended to show the recent growth in number and capital of state banks and national
banks in two important groups of states. The returns given for state banks, being
partly official and partly unofficial, leave much to be desired, and in the year 1 884-1 885
only supply the figures for three States. It should be said, also, that, in the case of
Kansas, the figures for the two earlier years probably include some savings-banks, the
law of the state not drawing the line distinctly at that time.

[Capital given in millions and tenths. '\





State Banks


National Banks




1884-1885


I 887-1 888


I 890- I 89 I


1884-1885


1887-1888


1890-1891




No.


Cap.


No.


Cap.


No.


Cap.


No.


Cap.


No.


Cap.


No.


Cap.


Wisconsin








64


«3-8


91


^5-2


50


^4-4


57


^5-2


69


56.8


Iowa . . .








74


4-


122


6.4


122


10. 1


129


10.2


141


12.1


Minnesota


34


fo-9


61


5-7


93


8.1


50


"•3


57


13-7


59


14.1


Missouri . .


187


13-


238


134


401


16.7


40


6.3


49


"•5


80


23-9


Kansas . .


54


2.1


177


6.6


134


5-8


60


4-


146


II. 2


152


13-4


Nebraska . .








69


2.2


356


9-


63


4.8


104


8.4


136


12.8


N.Dakota .->
S. Dakota . 1







23


.6


51
65


•7
1.8


35


2.1


62


3-7


29
39


2.
2.5


Virginia .








64


3-5


93


5.8


24


3-5


25


3.8


33


4-3


N. Carolina .








16


I.I


29


1.8


15


2.4


19


2.5


20


2.5


Tennessee








28


2-3


64


5-


33


5-


40


7-5


52


10.


Mississippi .








14


X.I


54


3-3


5


•4


12


I.I


12


I.I



192 ESSAYS

So far as the legislation of the several states still retains its
provisions for the issue of notes, there is the same variety which
existed before the Civil War. The issue of notes by banks incor-
porated under general acts, the issue by banks under special char-
ters, the issue of notes by private bankers under state regulation,
may all be found provided for in one state or another. In some
cases provisions have been retained which contemplate the deposit
of adequate security, and in others no specific security is called for.
In the states which in 1861 suffered the most from the collapse of
free banking systems based upon inferior securities, the sections
relating to the issue of notes will be found generally, and perhaps
in all cases, to have dropped out of the statutes in some later re-
vision ; but, so far as issue is still recognized by the states as a
theoretically possible function of their banks, there is the same
variety of method and even of purpose in the restrictions applied
to it. In the event, therefore, of a general revival of state legis-
lation upon this subject, there is nothing in such provisions as now
exist, nor is there anything in the character of the other state laws
respecting banks, to lead us to look for any greater uniformity of
system than formerly. Opinions may differ as to the possible
effect in all parts of the country of a more enlightened public
opinion in enforcing the demand for the protection of note issues
by sound legislation, but there can hardly be a difference as to the
probability of great variety in the methods of protection to be
adopted, and in their comparative efficacy.

It is clear that the present demand for rejection of what had
by common consent been regarded as the most valuable character-
istic of our national bank currency — its complete unity — cannot
be made by any considerable part of our people except under the
spur of some keenly felt demand. The sections where the pres-
ent movement probably finds its greatest strength are those in
which heretofore there has often been a strong tendency to favor
the exclusive use of that simplest of all currencies, the greenback.
The change of preference from one issue to countless issues, from
notes having universal credit to notes limited in their use to a
state or perhaps a county, has had some strong reason in the
economic condition of the sections where opinion has thus veered.
The sections concerned are agricultural ; they are depressed by the
low prices of their great products ; they depend upon others for



THE BANK-NOTE QUESTION I93

no small part of their manufactured supplies ; and their people
are in debt. In a vigorous statement of the condition of the South
a few months ago, Hon. H. A. Herbert, of Alabama, traced the
origin of this state of things to the system of federal taxation.
The South, he maintained, has worked with incredible industry
for fifteen years ; but its gains have been steadily drained away by
taxation, to be expended in other parts of the country, and in the
end the South finds itself as poor as ever. Without discussing the
question here raised as to federal taxes, and only noting that, if
we accept Mr. Herbert's opinion as to their effect, the logical con-
clusion would be that the remedy should be sought in a reform of
taxation and expenditure, and not in a revolution of the currency,
we remark here the same complaints as to insufficient means and
pressure of debt which have come from the South during the
greater part of its existence. The condition of much of the West
and Northwest has been described by Hon. M. D. Harter, of
Ohio, in very nearly the same terms.^ Those sections, as a whole,
also feel the present stress of low prices, are large buyers and
large debtors. Aside from the question as to federal taxation,
they, too, are pressed, as they always have been pressed, by the
need of more and more capital for the development of their abun-
dant resources and the employment and support of swiftly growing
populations.

Both in the South and in the West evils of this description have
been experimented upon for years, without disclosing any cure
except that which comes with the gradual accumulation of wealth
in a mature community. Every form of currency has been tried
by turns, — specie, paper, national, local, — with the sole result of
showing that the economic malaise might easily be aggravated,
but could not be cured. It has its origin in the fact that any coun-
try which is being rapidly taken up, and is therefore essentially
new, whatever the age of its political fabric, is apt to need for pres-
ent use more capital than it has had time or opportunity to acquire.
As a whole, it is in debt ; and, as individuals, its citizens are bor-
rowers. This pressure to borrow is plainly not to be satisfied by
dilution of the currency. Although the present need of an indi-
vidual debtor may be satisfied by mere paper, the relation of the

^ For the speeches of Messrs. Herbert and Harter, made in Boston, June 13, X892,
see the Boston Herald of the following day.
o



194 ESSAYS

community, as a whole, to other sections and to the outside world
in general, requires something more solid, — something as sohd as
the general standard. And, as now seems to be generally rec-
ognized, the pressure is not to be satisfied by an ampler currency
for the country at large, however sound. Aside from the tempo-
rary effects of any sudden change in the general currency, alter-
ation in its amount does not alter the relation which the sections
under rapid development bear to the rest. They are still sure to
require large supplies of capital, in one form or another, beyond
their own ability to supply, and sure therefore to appear in the
market as borrowers.

But, as has already been suggested, the individual's share in
this general pressure is felt by him as a need for that which will
pay debts, a need for currency, and so as a need for loans from
banks or bankers in any form which will provide him with the
means of present payment. The rapid multiplication of banks
under state legislation is the natural expression of this necessity,
on the part of the individual, of finding some means for making
his hope in the future available as a present supply ; and the oppor-
tunity is found under the state systems, because under them there
is no requirement that any part of the capital of a bank should be
invested at a rate so low as three per cent, and because, in other
respects, the state systems are often freer from regulation and
from disagreeable restrictions. But the tendency for an increase
of banks under state legislation is only the recurrence in a new
form of a phenomenon which has often appeared in the history of
the farming states. Public opinion on the subject of bank credit
has undergone many singular changes in those states. Some of
them have at times encouraged the wildest schemes of paper cur-
rency, have at times rushed in despair to the opposite extreme of
discouraging even sound banking, and again have relapsed into
the old toleration of whatever can be passed from hand to hand.
But at every stage the real effort has been the same, to supply
themselves with capital beyond their possible accumulations, — the
necessity under which any quickly developing and enterprising
community must needs find itself. It is a real and even inevitable
want therefore, and not a mere craze for expansion, which seeks
satisfaction at the present time and stimulates the call for a prac-
tical restoration of the right of issue to state banks.



THE BANK-NOTE QUESTION 195

Indeed, it may be added here that the increase of banking in
the West and South has not hitherto been excessive, nor does it
generally tend to excess now. Omitting from consideration the
private bankers, as to whom there is unfortunately no longer any
means of attaining even approximate information, the increase of
national and of state banks together in these sections, in the last
twenty years, has not more than kept pace with their general
growth, and has fallen behind the growth of some of their leading
interests. The natural spread of banking operations has appar-
ently been hampered and held in check ; and we should probably
be safe in finding the obstacles to be the failure of Congress to
encourage organization under the national system, which for some
years has visibly checked the increase of national banks, and
some reluctance of banking capital to organize under the liberal
but still inferior state systems.

But there is an important distribution of banking facilities in
progress, in addition to the simple expansion of their amount.
Reference has already been made to the establishment, under
state systems, of banks with capitals much below the minimum
allowed by the national banking law. No doubt many of the
banks thus established are below the minimum of safety. With
their trifling resources, it is impossible that they should command
for their service such experience and capacity as their operations,
although on a small scale, really require in the interest of the com-
munity. And yet the increase in the number of such small banks,
hardly to be distinguished from the smaller class of private bankers,
comes from an obvious tendency to carry banking facilities farther
and farther from the great centres and to open the way for their
more general use by the community at large. In short, there is
not only a movement of increase, but a movement of diffusion
going on, which is probably the result, not merely of the general
pressure of debt in certain sections, already spoken of, but of a
healthy desire to use more freely and widely than has hitherto
been possible in sparsely settled communities the modern methods
and agencies of commerce. The state systems afford an opening
for this movement, and have therefore an importance in the busi-
ness organization of the United States at this moment not always
recognized in the more densely populated and wealthier parts of
the country. With the quickened movement of commerce pro-



196 ESSAYS

duced by the railway, the telegraph, and the telephone, an eco-
nomic need for the wider distribution of the machinery of exchange
is developing, which the smaller banks under the state systems
satisfy, — not perhaps in the best manner, but still in an important
degree. When a Western state provides, as Nebraska does by its
act of 1889, that banks with a capital of only $5000 may be estab-
lished in towns having less than one thousand inhabitants, we must
recognize that for that community, under its conditions, the complete
diffusion of banking is felt to be a necessity. In this respect, the
sparsely settled states are attemping to secure, by the multiplica-
tion of independent banks, the same advantages which in England
and Scotland have been obtained through the multiplication of
branches by a limited number of banks.^

These considerations undoubtedly show that the state banking
systems, in the present condition of the country, have an impor-
tant sphere to fill ; and they raise the question, moreover, whether
the national banking system might not be adapted by judicious
amendment to meet wants which it cannot now supply. Leaving
aside altogether the conditions on which notes are issued, and
regarding the national banks merely as banks of discount and
deposit, it would seem that this might easily be done. The smaller
banks, especially, would be put on far more equal terms if they
were relieved from the present useless obhgation of a relatively
heavy investment in United States bonds. Moreover, the greatest
possible diffusion of banking facilities, under an admirably guarded
system, might be secured if the establishment of branches were
encouraged and facilitated by law. That, in the present state of
opinion, the branches of a central bank would have to contend
with some local jealousies is probable ; but any real improvement
in commerce or finance is tolerably sure to make good its footing.
It is obvious, also, that, if the multiplication of branches were once
fairly recognized again in the United States as a natural method,
as it has been in the past, it would be as available for central
banks under the state systems as for national banks. For both

1 The ten great Scotch banks have not far from eight hundred branches in all,
carrying their operations into every village. A similar practice in England and Wales
gives about two thousand six hundred banks and agencies outside of the metropolis.
Both in Scotland and in England there is a sharp competition over the vi^hole field, so
that even insignificant towns are apt to have more than one banker.



THE BANK-NOTE QUESTION 197

alike it would have the convenience of making it unnecessary to
provide a full board of directors for every establishment, large or
small, — a necessity which is often embarrassing in small places,
— since a local manager under the direction and supervision of a
central board could often perform the duties for which a local
board now has to be made up. For both alike it would tend to
diffuse business risks over somewhat larger areas than at present,
with a gain analogous to that which such diffusion brings in
insurance; and for both it would be possible to apply banking
capital at a given moment according to the unequal and variable
needs of the different parts of any section covered by a given insti-
tution and its agencies.

But, besides a demand for the extension and diffusion of bank-
ing in the sections referred to above, there is also a pressure, felt



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 21 of 40)