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more keenly by them, but also observed elsewhere, for greater
elasticity in the paper circulation of the country. In the United
States — as in other countries having great annual movements of
agricultural products — there are tides in the demand for tangible
currency for actual use. Increase or diminution of the volume of
general exchanges in urban communities is readily enough adjusted
by variation in the amount of the more subtle medium known as
bank deposits ; but the marketing of crops in many states by
farmers remote from banks, and little accustomed to transactions
through them, means a temporary increase in the use of money or
its substitutes. No doubt the extension and general diffusion of
banking will finally minimize this increase, as it does in Great
Britain, where the annual tide of tangible currency is moderate in
its amount, although clearly visible in its flow ; and probably the
smaller banks in the Northwest do much to meet this necessity
for an expansible medium. At present, however, the want is
serious, notwithstanding the heavy shipments of currency annu-
ally made in the harvest months from the financial centres. With
this regularly recurring demand for an elastic medium, the
United States have for years been content with a singularly rigid
system of paper currency, approaching year by year closer and
closer to the condition of absolute inflexibility. The trifling gain
made by the government from the issue of treasury notes has
been treated as a complete offset to the vastly greater loss caused
to the people at large, by their inability to use credit currency at


the times and in the forms which our immense domestic commerce
requires. Any reaction from this narrow conception of the public
interest as something measured by the footing of a treasury
account is a hopeful sign ; and it is probably to the long-felt need
of some elastic quahty in our currency beyond that offered by the
export and import of metal, that much of the existing desire to
find some terms on which state bank-notes can be issued is due.
That notes issued by banks in response to a commercial demand
for loans, and redeemable at sight in specie, are in general the
most convenient form of elastic currency, and the most quickly
responsive to the needs of the community, is recognized. That
such notes are the form of currency best adapted to meet the
tidal demand referred to above seems to be clear. But to make
their issue safe, to avoid the needless rigors of the national
banking system and not to lose its palpable advantages, is the

Of the solutions offered for this problem, looking to the re-
newal of issues by state banks, two now seem to invite special
attention : first, the proposition to simply repeal the ten per cent
tax which has excluded state bank issues from the field since 1866 ;
and, second, the proposition to allow notes to be secured by the
deposit of a very wide range of securities, and then to extend
the right of issue, upon terms not settled, to all banks, state or

The naked proposition to repeal the ten per cent tax must be
treated as, in fact, a proposition to return to the state of things
existing before the war. It is vaguely said, indeed, that such a
return is now impossible ; that no state would consent to the issue
within its borders of unsound notes ; that it is an insult to the intel-
ligence of the state legislatures to suppose that any of them would
be less scrupulous than Congress in providing for the absolute
security of every dollar authorized by it. But all this confident
assurance is unsafe ground for legislation. The paper currency of
the country is too important to be left for its regulation to our
faith in human nature alone ; and though we may hope, or even
bcHeve, that the past will never return, it is well to be admonished
by experience. Trust as we may in the universal desire of the
state legislatures to keep on the solid basis of hard money, the
repeal of the tax would indisputably open the door for evils which


were rife only a generation ago, and were no worse than those
threatened within that period by popular crazes over large sections
of the country. That the loss, in case of bad or mistaken local
legislation, would be local, as is sometimes urged, is not to be taken
for granted. On the contrary, with the present close commercial
network covering the whole country, it may be fairly assumed that
injury to any state by reason of a vicious local currency would
mean injury to others also, and that in this respect, as in others,
all are concerned in the welfare of each.

At its best, therefore, the simple repeal of the ten per cent tax
means the substitution of multifarious issues for the uniform cur-
rency of the national banks. This follows as a necessity if note issue
is left to local legislation, the agreement of legislatures upon a uni-
form type of bank-note and upon uniform conditions of security
being as impossible as their agreement upon any other matter of
public concern, with the added difficulty that with respect to banking
the real or supposed interests of the different local constituencies
are notoriously at variance. Federal supervision of issues made
under the authority of the states is sometimes hinted at, but can
hardly be said to be distinctly proposed. Indeed, it would probably
be far from satisfying the wishes of those who urge the simple
repeal, their object being apparently to secure something far more
free, flexible, and responsive to local opinion than any federal reg-
ulation would allow. But, however this may be, the notion of a
federal control of issues made by state corporations acting under
the laws of the states presents legal and constitutional difficulties
grave enough to authorize us to lay it aside until some distinct
scheme for establishing such control is formulated.

Looking forward, then, to a state of things in which each state
should have its own system of issue again, with a possible uni-
formity among the notes of all banks in any one state, we must
contemplate the introduction of a bank circulation of unequal value
in different parts of the Union. The uniform value which national
bank-notes have in every state — the quaUty which was relied upon
from the start as a chief recommendation of the system — comes
from the universal knowledge that all essential conditions affecting
one note are like those affecting any other, and from the uniformity
of type which spares the receiver of bank-notes the trouble of even
reading the name of the issuing bank. It may even be doubted


whether the engagement for redemption at the Treasury gives them
any considerable addition of credit, or has any practical effect in
increasing the confidence with which they are taken at a distance
from the place of issue. The fact that one note is substantially
like another in all essentials and is receivable in payment by any
national bank in any part of the Union, secures absolute uniformity
of values and ease of flow in circulation. But this advantage is
necessarily abandoned when the conditions of issue and the degree
of ultimate security vary from state to state and become matter of
inquiry whenever unfamiliar notes meet the eye, — possibly matter
of special knowledge, attained by experts only. The rich experience
of 1 850-1 860 showed that even notes of unimpeachable strength
found some resistance to their circulation, and so lost something
of their value, when far from home. The dealer in un-current
money in those days was a well-recognized figure in large cities,
dealing not necessarily in bad bills, but in bills not current on the
spot, and therefore subject to discount. Inequahty of value like
this, even if it is the result of mere unf amiliarity and doubt affecting
the notes of distant banks, is a defect in a paper currency, and a
return to it would be a long step backward. Uniformity and
instant recognition are nearly as important for the paper of the
country as for its coin, and can only be secured by analogous con-
centration of control.

It is to be remarked here that the practical confinement of
local issues to their own territory has been advocated, especially
within the last few months, as an arrangement to be desired on its
own account. Certain sections, it has been contended, suffer for lack
of sufficient currency, and their needs can be supplied by ample
local issues, and this with all the more ease and certainty if such
ample issues have only a restricted circulation. This is doubtless
true on condition that the local issues are of inferior value, or, in other
words, depreciated in comparison with the currency of the country at
large. It is not many years since the whole country, indeed, had a
local currency available for use only within the United States, and
altogether cut off by its depreciation from the currency of the world.
It is not probable, however, that, in contending for localized issues,
any large number of persons would now seriously propose the
establishment, or the possibility of establishing, ten, twenty, or
forty local currencies, each with its own special scale of deprecia-


tion and discount. But whether such local issues can be estab-
lished, and have the effect of insuring local abundance of currency
without depreciation, is a question which will be considered further
in the latter part of this paper.

The proposition, then, to simply aboHsh the ten per cent tax,
or by any other process to remit the control of note issue to the
several state legislatures, appears to the present writer to destroy
the security of the bank-note by opening the door for abuse and
mistake, and to sacrifice the immense advantage of a currency of
uniform value afforded by the national bank system. We have,
then, to consider next the proposition to widen the range of secu-
rities on which the issue of national bank-notes is allowed, and to
extend the right of issue to all banks, whether state or national.

This second proposition may be taken most conveniently in
the forms in which it has been stated at different times by Hon.
M. D. Harter, of Ohio. It contemplates, in the first place, the
admission of many varieties of first-class securities, as well as the
bonds of the United States, as the basis of an issue of notes, on
the general ground, no doubt, that the securities which the com-
munity finds to be solid enough for the investment of trust funds
and of other moneys- requiring absolute safety are also solid enough
to be held as a part of the protection required for bank-notes. In
Mr. Harter's own statement of this plan,^ long considered and
carefully weighed as he assures his readers, he proposed to admit
state, county, city, and railway bonds. In a bill for similar pur-
poses, to which he has more recently given his support,^ state and
county bonds are omitted from the list, probably on the ground of
some practical difficulties of discrimination between the good and
the doubtful, and, possibly, in view of some difficulties in the way
of enforcing payment in case of default. In both forms of the
proposition, the listing of the bonds for five years upon the stock
exchange of some large city, the maintenance of their price at a
premium of not less than five per cent, and the steady payment of
interest, the obligation for which must be expressly on the gold
standard, are among the conditions to be observed, in order that
bonds may be deposited by any national bank desiring to issue
notes. So far, then, the proposition is in the line of others which
have been suggested in the last few years, but for some reason

1 The Forum, October, 1S91, p. 1S6. - Boston Herald, June 14, 1892.


never thoroughly investigated, looking to the enlargement of the
present shrunken basis of the national bank note system. In the
method of extending the right of issue to state banks, however,
the two forms of the plan differ radically. In its earlier form
Mr. Harter proposed that the tax upon notes of state banks
should cease, provided such notes are secured in the same manner
as notes of national banks by bonds deposited with the auditor
or treasurer of the state, and provided that each state should
guarantee the payment of the notes issued by its own banks, the
amount of notes to be issued by state banks being determined by
each state for itself, and the state banks not being required to
redeem elsewhere than at their own counters. In the later form
of the plan, after providing that the United States shall no longer
guarantee the payment of national-bank notes, — a provision
which is strengthened by the proposed abolition of the present five
per cent redemption fund, — it is simply proposed that the notes
of state banks shall be subject to the same tax as notes of national
banks, and no more.

In its later form, this plan, to which Mr. Harter has now com-
mitted himself, is not to be distinguished from the naked proposi-
tion to simply repeal the tax on state bank issues, leaving them to
enter the field upon such terms of security and in such quantity
as the state legislatures may severally prefer, — allowing the
national banks to compete with them upon terms in some respects
better than at present and in others worse. The unity and the
uniformity of value of the bank circulation is to be destroyed, and
our only security from unsound and depreciated local issues is to
be found in the chance that all state legislatures may have learned
equally well the hard lessons of financial safety.

In its earher form, Mr. Harter's proposition appears to have
been more promising. It held out the prospect of a uniform basis
of security for state issues and national alike. No doubt the first
attempt to throw into shape rules for its practical operation would
have shown the necessity of placing both kinds of issue under
national supervision and control. This would have given the
system a strong resemblance to that embodied in the first national
bank act (the act of February 25, 1863), for enabling banks, while
still carrying on business under state laws, to issue national cur-
rency secured by the deposit of United States bonds in the Treas-


ury at Washington. ^ This provision, which at the time answered
the purposes neither of the friends nor of the opponents of the
national banking system, was strongly disapproved by Mr.
McCulloch, then Comptroller of the Currency ^ and deeply inter-
ested in extending the national system, was struck out from the
revised act of 1864, and thus never took effect. At that particular
juncture, when Congress had undertaken to obtain the whole field
of circulation for a secured national currency, there was no place
for such a halfway measure. At the present time, when the
national-bank notes are being pinched out of existence by the
failure of Congress to provide a wider basis for them, and when
unlimited license for state issues is demanded as the alternative
which is to save us from a paper currency depending for its
amount upon the bare dictate of Congress, the opportunity for a
measure which should place state and national issues upon the
same footing and under the same guardianship would seem to be
better. But Mr. Harter's proposition, while proposing the same
basis of bonded security for all issues, falls immeasurably below
the short-lived scheme of 1863, inasmuch as it lacks the unity of
control which is the only possible guarantee for faithful and uni-
form enforcement. It is not surprising, then, that, having once
set himself in opposition to national control, he should now have
taken the further step of proposing to leave the regulation of state-
bank issues altogether to the discretion and prudence of the state

In these propositions, which we have taken as somewhat typical,
and in a large part of the current discussion of this subject, there
is expressed, as we have said, a strong desire to provide for ample
local currencies in particular sections. This is quite independent
of any judgment as to the feasibility of widening the basis of the
national currency and so rehabilitating that system of issue. It
is urged as a defect of the national-bank note that it goes into
circulation " with no localizing tendency, with no habitat, but en-
dowed with every attribute tending to induce its centralization at
the great financial cities and its removal from the country dis-
tricts."^ In short, it is objected that the bank-notes now have

1 See sections 61-64 of the national bank act of 1863.

"^ Report of the Comptroller of the Currency, 1863.

3 Commercial and Financial Chronicle, May 14, 1892, p. 7S2.


the quality of metallic money, and, like gold, will flow and accu-
mulate as the current of internal commerce may require, having
hardly more tendency to remain near the place of issue than coin
has to stay in the neighborhood of the mint, except so far as their
movements are arrested by redemption at the Treasury.

It will assist us in weighing the force of this objection if we
first consider the movement of a currency exclusively of coin. It
is distinctly recognized that a coin medium will not distribute
itself with equal depth over sections of a country which differ in
resources, industry, and acquired wealth. Notwithstanding the
immense volume of transactions settled finally by exchange of
products, the farming sections will steadily keep themselves bare
of coin by their heavy purchases in anticipation of the future, and
by their normally increasing payments for interest on the capital
invested among them by non-residents. If they were less enter-
prising and progressive, payment in products might keep pace
with their obligations ; but their vigorous industry constantly im-
pels them to push the use of their credit and to keep their stock
of money low. As communities, they invite loanable funds by
high rates of interest ; but no transfer effected in this way gives
anything more than a temporary relief from the dearth of coin.
In the present stage of their development they have uses for
goods which stand higher in their estimation than their uses for

In describing the unequal distribution of a medium supposed
to be exclusively of coin, the language used runs of itself into the
present tense, as though the imagined medium were really existent,
because that which is true of coin in this particular is true also of
a paper currency which is really redeemable in coin and is of uni-
versal credit. Such paper will serve the purpose of remittance
and payment as well as coin, and will be collected and remitted
accordingly, when the conditions of trade would cause coin to be
so used. This will be effected directly or indirectly by the people
themselves in making their necessary payments; and the converti-
ble paper, like the coin in its distribution over the surface of the
country, will be found in greater depth at the financial centres,
because it is there that payments are due, and because, under
existing conditions of supply and demand, payments, if made in
products alone, can only be completely so made when the local


currency is at the minimum quantity. This state of things, which
we believe is also as well recognized as the inequality with which
coin alone would distribute itself, is not to be remedied by raising
the general level of the supply of convertible paper in the country
at large. Aside from the effect which might thus be produced on
the movements of money between this country and others, the
increase of the general mass would only temporarily change the
relations of the farming sections to others, even if the whole
addition were first to come into circulation in those sections.
Their industrial conditions would still cause them to part with all
but their quota of the increased amount, and they would soon be
found in possession of only their customary proportion of coin
and paper, and subject to the same inconveniences as ever.

But let us now suppose that, instead of a redeemable paper
having universal credit, each section uses a redeemable paper
having only local credit, having a " habitat," therefore, and certain
to circulate only within or near the state in which the issuing
bank is established. Is it not certain that, if the trade relations
of an agricultural section are such as would draw away from it
coin or its paper of universal credit, if such a medium existed,
they will now equally draw from it coin or legal tender paper,
these being obtained by sending in bank-notes for redemption ?
The bank-notes are not themselves available as a remittance ; but,
if redeemable, they can instantly be turned into that which is
available. This would leave a really redeemable local currency in
the same scanty condition, and for the same reasons, as a medium
of national credit would be under the same circumstances. We
may, indeed, suppose that the local banks, the issuers of currency,
continue to issue notes in place of those which are redeemed, and
attempt thus to raise materially the level of paper in their neigh-
borhood. In that case, their vaults become the ready source from
which gold may be drawn for export from the section, and the
relative cheapness of gold in the section gives a motive for its
export, either to pay for fresh purchases of goods or for use in
other money markets. In short, so long as the redemption of
paper is real, the restricted area of its circulation will not supply
the means of raising the level of a local currency permanently
above the mark which is settled by the normal course of payments
to and from the state or section concerned. It is true that, if the


redemption is not real, if the paper is openly or disguisedly incon-
vertible, it may be heaped up within the given area to an indefinite
amount and with a corresponding depreciation.

The question, then, whether the restoration of the state-bank
issues and their regulation at the pleasure of the states is to be
followed by real specie payment by state banks or by suspension,
is of critical importance ; and it may be doubted whether it has
been faced squarely by those who advocate such issues as a source
of locally abundant paper. But here, after all, would seem to be
the kernel of the whole question ; for, on the supposition that
specie payments are to be maintained everywhere, — as most of
the advocates of state issues must be supposed to intend, — the
proposed change must be futile for its avowed purpose ; and, if
suspension is to follow or to be risked anywhere, the measure
is an abandonment of that solid ground of hard money which our
people, after a long and bitter experience, finally reconquered
under the resumption act of 1875.

In this discussion the varied political aspects of the question
before us have had hardly a passing glance ; and it is not worth
while to enter upon them now, except to notice the frequency
with which, in one form or another, the argument z« terrorem is
advanced, — the argument that the state-bank issues should be
freed from restriction lest a worse thing befall us. We are told
that it is idle to hope for action which shall give a future to what
is called the national-bank monopoly, and that the state banks,
therefore, afford the only chance for a credit paper issued in
response to commercial demand ; and that state-bank notes alone
can save us from complete surrender of the field to government
issues ; and that the restoration of local currencies is alone able to
divert a large section of our people from the crusade in favor of
the free coinage of silver. It may be true that there is ground
for anxiety in one or all of these directions. But, if the financial
history of the United States teaches any lesson, it is this : that,
with the American people, sound doctrine and salutary measures
are strongest when their advocates are fearless, and refuse to yield
ground to the suggestions of timid expediency.


The legal tender notes of the United States present now, as
they always have presented, an appearance of great simplicity.
There are still but two such issues, the United States notes of the
Civil War and the coin notes of 1890: their legal tender power
has few exceptions, and the obligation for their redemption is to
be read in a few lines. Take away the confusing element intro-
duced by the silver agitation, which is quite extraneous to the
original conception of the legal tender paper, and what is in itself

Online LibraryCharles Franklin DunbarEconomic essays → online text (page 22 of 40)