Charles Franklin Dunbar.

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of directors to give the requisite attention and thought to what is,
after all, a matter of but trifling importance to any one individual,
but there is also the often experienced embarrassment in finding

1 The present Comptroller of Currency has urged the introduction of the branch
system in his Report for 1896, p. 102 ; and the same ground was taken by Secretary
Carlisle, Finance Report, 1895, P* ''"'''iv.

2 For this also see Report of the Comptroller of the Currency, 1896, p. 102.


among the business men of a village the material for making up
a competent board. The best promise of good management is
afforded by a bank with an immediate constituency large enough
to supply an ample choice of men, and with a capital large enough
to secure the pressure of a full sense of responsibility, and to
demand a reasonable share of time and care from an unpaid body
of men. In short, any change in capital should be in the direction
of consolidation rather than subdivision. The smallest class of
national banks now in existence should shrink, and the extension
of the system should be effected by banks of more considerable
capital, if we are to move towards the most efficient and safe
organization. As for the suggestion that such a movement would
mean diminished competition and the " concentration of the
money power," a system of thirty-seven hundred members would
afford ample scope for healthy consolidation long before the
danger point could come into view. As for any risk of monopoly,
if the power of establishing branches were restricted within state
lines, every state would be likely to find within its borders suffi-
cient competition among its own banks to give its people the full
benefit of diffused accommodation, free from external control or
internal combination.

So far our discussion has turned chiefly upon the present
inability of the national banking system to develop banking in ac-
cordance with pressing needs of important sections of the country.
The further objection that the system is not so constituted as to
supply an elastic currency points to a defect in the working of the
bank circulation in every section. This objection is indisputable, if
we give to the word " elasticity " the meaning usually given to it in
banking discussions. If by elasticity we are to understand nothing
more than mere capacity for growth under favoring conditions, or
variability, no doubt the bank circulation has varied and has had
its periods of growth. It rose rapidly in its earlier period, when
the investment in bonds yielded a high return ; it ran down for a
long series of years as the return upon bonds declined ; and it
rose again after the revulsion of 1893, when with the decline of
bonds the return upon them advanced. But the elasticity of a
currency is understood to mean something quite different from
this tendency to vary over long periods. It means responsiveness
to present increase or diminution of demand, — the power of


adaptation to the needs of the month, the week, or the day,
whether rising or faUing. A glance at the figures for any series
of years, or for any period of marked change in affairs, shows that
the national bank circulation has never had this quality. How
should it be elastic ? Elasticity implies the operation of counter
forces, in a currency as well as in a steel spring. That a currency
may be responsive to demand, it is necessary that the forces, tend-
ing respectively to expand or to restrict, should be forces at work
in the daily business of the bank, where it is brought into contact
with the community by the stream of loans, deposits, and pay-
ments. But under the national system at present the motives for
extending issues are completely separated from real banking con-
siderations, and such tendencies for the return of notes as exist
are equally foreign to the relations between the issuing bank and
that portion of the public which it serves.

The failure of the national system to provide for a return flow of
notes by some effective plan of redemption is no doubt due to the
circumstances under which the national bank acts were passed.
Looking to a distant future, the acts contemplated an ultimate
return to specie payment, and some of their provisions were
shaped accordingly. But, after all, Congress was not greatly
interested in any present requirement of redemption, when, so
far as could be seen, the redemption of a note must for years mean
no more than its exchange for another piece of paper, itself irre-
deemable. To tie the bank circulation to the public debt, and
thus to secure for it as good a chance of ultimate solvency as a
promise by the government could then have, and to give the bank
paper universal credit, were immediately attainable results, beyond
which there was not felt to be much necessity for looking. The
act of 1863 accordingly made no provision for the ordinary re-
demption of bank-notes anywhere except at the counter of the
bank itself; and the chance of presentation there was obviously
so slight, that Mr. Sherman cheerfully assured the Senate that
" these notes, all being the same," so far from having a pitiful life
of thirty or sixty days, "may have an indefinite circulation, and
the average may extend to years." ^ It was clearly the expectation
that the notes, when once set afloat, would drift on the ocean of

1 Cong. Globe, February 10, 1863, p. 843. Mr. Baker of New York, in the House,
insisted upon the need of central redemption. Ibid., February 20, p. 1141.



paper as long as their material could hold together. The amended
act of 1864 added the requirement that every bank outside of the
redemption cities should redeem its notes through some bank in
one of those cities, and that all banks in other redemption cities
should redeem their notes through banks in the city of New York ;
but, in the absence of any motive for demanding the redemption
of notes which every holder, whether a bank or an individual,
could use in his own payments, these provisions served only as a
reason for allowing banks to reckon as a part of their reserve the
funds deposited by them with banks acting as their redeeming

This inadequate arrangement did not satisfy the conservative
banking opinion of the country; and in 1865 and 1866 an impor-
tant movement for establishing assorting houses in the chief finan-
cial centres, with central redemption, was organized in New York,
Boston, and Philadelphia, with the approval of the Secretary of
the Treasury and the Comptroller of the Currency.^ The ele-
ments of opposition, however, were too strong. The project lost
its strength, and died ; and the opportunity was lost. The
national bank system grew up with an apparatus of redemption
which did everything but redeem ; and no change was made until
1874, when the function of redemption was transferred to the
Treasury, and banks were even forbidden by law to redeem any-
where else, except at their own counters. Thus we have to-day
a system of so-called redemption, which no doubt removes from
circulation notes which for sanitary reasons, or from wear and
tear, are unfit for further use, and enables banks which are over-
loaded with bank-notes at any season to convert them into green-
backs ; but, plainly, the redemption thus carried on has little
more than an accidental connection with the financial condition
of any issuing bank. A large amount of notes may be passing
through the Redemption Bureau ; but the National Bank of X
has no reason to look for any unusual return of its notes, however
extreme its expansion may be, for the holder of its notes, what-
ever the amount of its obligations, will sooner use them in pay-

^ For the action of the banks engaged in this movement, and for Secretary McCul-
loch's part in it, see Banker^s Magazine, 1865-1866, pp. 193, 401, 415. For the views of
the Comptroller of the Currency, Report, 1865 (for Mr. Clarke's) and (for Mr. Hurl-
burd's) 1866 to 1870.


ments than waste time by sending them to the Treasury. This
is not a kind of redemption which can possibly make the bank
circulation responsive to the demands of business, whatever else
it may accomplish.

The singular futility of all this part of our legislation is no
doubt closely connected with the ideas as to the meaning of note
redemption in general, which have grown up in connection with
the greenbacks. Even before the act of 1878 ordered the reissue
of the redeemed greenbacks, the original idea of redemption as
the fulfilment and ending of a contract had been obscured. That,
as a matter of legal interpretation, a note " retired and cancelled "
had been paid, and that any new issue must be a new debt, re-
quiring clear legal authority for incurring it, had been disputed
for more than ten years,^ until something more than the mere
interpretation of a statute had come into the question. From 1866
to 1878 there is shown in the debates and the acts of Congress a
progressive weakening of the force assigned to the term " redemp-
tion," and the growth of an opinion that everything needful is
accomplished, if the opportunity for an exchange of one kind of
currency for another is somewhere held open.

But is it enough that every holder of government or bank
notes should understand that gold can always be had for the
paper at the Treasury or the bank ? Especially as regards bank-
notes, can redemption do its work if it is merely a passive arrange-
ment for possible payment, in case anybody thinks it worth while
to call for it, and not an active system of prompt presentation .-'
At the bottom of much that is said and written on this subject
there would seem to be an impression that to give the public
convincing assurance of convertibility is the only object to be
provided for. But the redemption of a currency has a bearing
much broader than this. The exchange of notes for specie on
any large scale is called for in most cases because the trade rela-
tions of the country or the section concerned are such as to make
specie for the time its cheapest export. This state of things may

^ In January, 1868, Mr. Edmunds stated in the Senate his opinion that the notes
"retired and cancelled" under the act of 1866 could be reissued, and moved an amend-
ment to a pending bill to prevent this. Mr. Sherman ol)jected that reissue was illegal
and further legislation on the point needless, and Mr. Edmund's amendment was lost.
Cong. Globe, January 10, 1868, pp. 435, 529. Six years later $26,000,000 of notes once
" retired and cancelled " were reissued.


be the result of deplorable misfortune or of equally deplorable
folly ; but in either case it is the misfortune or the folly that is
to be deplored, and not the process by which we pay in the easiest
way the debts which have been created. The payment is, after
all, a curative process, by which our currency seeks the condition
of equilibrium with our real ability to hold money, as the first step
towards sound strength ; and it is for the general interest that the
movement of specie should be easy, and that the payment of our
debts, in this form as well as any other, should be prompt.

Moreover, whether we look at the government issue or at that
of the banks, it is important that the natural effect of a depletion
of our currency by specie export should not, under ordinary cir-
cumstances, be thwarted or warded off. In the one case, for the
government to undertake, by the reissue of its notes, to keep up
the domestic currency in the face of a movement for redemption
and specie export, is to make that currency, so far as may be
possible, insensitive to the influences which tend to its final re-
plenishment. Mr. Sherman perhaps had a vision of this truth
when he recommended "that by law the resumption fund be
specifically defined and set apart for the redemption of United
States notes, and that the notes redeemed shall only be issued in
exchange for or purchase of coin or bullion." ^ No doubt such an
arrangement, so long as Congress permitted its existence, would
at any rate have insured the close reciprocal relation which any
effective redemption of greenbacks should have with the active
currency, and would have made the position of the Treasury
defensible without the alternation of panic and loan which has
been witnessed since 1893. In the other case, it is almost equally
important that, so far as an export movement of specie draws from
the bank-note circulation, it should draw as directly as possible
from the particular banks which are in a state of relative expan-
sion. The drain of specie is presumably not the consequence of
any equally distributed imprudence or any level stroke of misfor-
tune ; and its effect should fall, both by the rule of right and by
that of expediency, upon some more heavily than upon others.
This can only be secured by providing for an easy, automatic
return of notes, so that expanded liability shall, so far as is
humanly possible, be followed by increased demand for payment.

1 Finance Report, 1879, p. x.


With the imperfect conception of redemption in general on
which our law proceeds, it is not surprising that the national-bank
note, when once issued, should be regarded as a liability of indefi-
nite date, differing from other bank liabilities in this, that the
issuing bank hardly need trouble itself as to its discharge. The
fact that it has thus become something not far different from a
permanent obligation, is no doubt one of the grounds for the idea
of unjust privilege which so many of our people connect with the
national bank system. It is also singularly at variance with the
principle of having a wholesome restraint upon the operations of
each bank by itself, which governs our treatment of other demand
liabilities. Provision for the systematic return of notes by other
banks, like the daily collection of checks, is so contrary to our
present established habits of thought that it seems abnormal, in-
consistent with full credit, and useless, if not hostile. But, not to
dwell upon other considerations, it appears too plain to require
demonstration that a regular return flow of notes is the necessary
condition of the elasticity which is now commonly demanded for
our bank currency. Elasticity cannot be secured without the
operation of restrictive force upon an outstanding circulation : re-
strictive force cannot operate there, except through the agency of
the holders of the notes ; and it can only operate through them by
virtue of some legal provision or of some convention or practice
having equivalent force. Of legal provisions for this end a striking
example is supplied by the law of Massachusetts, which from 1843
forbade any bank to pay out any notes except its own, and thus
made it necessary that notes received on deposit or in payments
should be sent to the issuing banks for redemption. Of a practice
equivalent in effect to this, there is the equally striking case of the
Canadian banks, which, without any requirement of law, but simply
as competitors for business, " demand prompt and daily redemption
of all the notes of other banks that have come in." ^ But our sys-
tem presents nothing analogous to these devices for making the
self-interest of the banks the restrictive force needed to secure
elasticity of issue.^ We appear to rely vaguely upon some sup-

1 Breckinridge states that the average life of a bank-note in Canada is found to be
about four weeks. "Canadian Banking System," p. 407.

2 Breckinridge gives {ihid., p. 408) a diagram showing the monthly variation of
the issues of the Canadian banks for fifteen years. The minimum is usually reached in


posed slowly acting tendency of the public to free itself by some
means of a currency, if felt to be excessive ; but we set no machin-
ery in motion for that purpose, and do not make it for the interest
of anybody in particular to do that which on general grounds may
be desirable for all. Even so radical a scheme of reform as the
" Baltimore Plan " contents itself with the existing provisions for

It is obvious that the practical difficulties of redemption have
multiplied with the growth of our system. Methods easily estab-
lished at the start would be difficult of introduction into a mass of
nearly thirty-seven hundred national banks. Still, unless we are
prepared to surrender the idea of true elasticity, the means must
finally be devised for making the bank-note as well as the check
present itself systematically and promptly for payment ; and it is
highly improbable that this can be done without restricting the
right of national banks to pay out other notes than their own. It
is conceivable, although unlikely, that competition might set in
among the banks of a single state, and prompt them to refuse of
their own accord to circulate each other's notes, although a result
like this — easy to understand in a system of only thirty-nine banks,
like the Canadian — would be hard to reach in states which count
their national banks by hundreds. But outside of its own state,
and probably within it, the circulation of a bank-note would have
to end by law with its receipt in payment or on deposit by a na-
tional bank, and its return for redemption would have to follow.

Probably the mere administrative difficulties in the way of an
effective system of real general redemption would not be found to
be so serious as they might appear at first blush. For the most
part the reserve cities, formerly known as redemption cities, would
be the natural centres of redemption, at which the banks would
clear their notes with each other as they now clear their checks in
a clearing-house ; and the two operations would be likely to be

June, but sometimes in August, and one year in September; and the maximum is always
near the beginning of November. From the lowest point to the highest, the average
annual rise, which disappears in January, is about twenty per cent., varying in the last
dozen years from under thirteen per cent in 1882 to twenty four per cent, in 1888.
There is also a small rise in the spring, nearly always at the beginning of April, but
occasionally a month earlier, trifling in amount, but singularly constant, and showing a
remarkably close correspondence between the notes in circulation and some regularly
recurring condition of business.


carried on under the same roof. The reserve cities would neces-
sarily exchange with each other, possibly at a common centre ; and
thus, the country being districted, presumably with reference to the
natural course of commercial payments, notes paid in or deposited
at any point would find their way back to the issuing bank, through
the same channels in which the streams of other liabilities flow back
upon the debtor banks, and without more difficulty. No change in
the present uniformity of design of the national-bank notes would
be required. Distinctive marks to determine the redemption dis-
trict in which a note belongs, and possibly its state also, could be
as easily stamped upon it as the charter number of the bank is now,
and would be all that is required for instant recognition. More-
over, the labor of assorting the notes, with a redemption system
once fairly in operation, is not to be inferred from the present con-
dition of the bank circulation. We now see a confused mass of
notes on which no regularly acting agency of this sort has been at
work; but, with an established compulsory return of notes, the
bank circulation of every part of the country would tend to be that
of the local banks. Notes might still stray widely, for uniformity
of system and design would give them the same ease of movement
among individuals as at present ; but the proportion thus carried
to a distance would not be great, and their wanderings would not
be of long duration. The whole circulation would probably be so
far localized that the chief labor in every redemption centre would
be to assort the notes issued in its own district and cleared by the
local banks ; and this would simplify and lighten a task which,
however formidable, would not be too great to be undertaken in
view of the object to be secured.

Returning now to more general considerations, the limitation of
the field of circulation to be expected from a system of actual re-
demption deserves a little further notice. Existing banks of rela-
tively large circulation might naturally dislike exclusion from the
wide area in which their issues now find their chance of long life.
So far as their gain from circulation comes from the supply of
currency for use in remote sections or those ill provided with bank-
ing facilities, they could not be expected to welcome a proposition
to confine them in effect to their home districts. But, besides the
general equity of an arrangement which would call upon any bank
to find its chief field for note issue in the community with which it


has its closest relations, it is of special importance for the better
distribution of banking in the United States that the opportunity
as well as the legal right of note issue should be more widely ex-
tended. The sections which now find the national system insuffi-
cient are those in which the sparseness of population and other
industrial conditions invite the use of bank-notes and limit the use
of bank credit in other forms. The local banks require the sup-
port to be obtained from circulation, and it is desirable as well as
equitable that they should be able to rely upon the support afforded
in their own neighborhood. A sense that the home field belongs
first to the home banks has shown itself in the demand for the
relief of state banks by the repeal of the ten per cent tax ; and this
feeling is too well grounded to be disregarded with safety. Cer-
tainly, if the national system is to be extended and popularized, it
will be necessary that in this respect the local banks should be
made as far as possible the natural sources of supply for their own

Whether the sections which are now deficient in banks of issue
would find their currency in actual use greatly increased under the
changed conditions here suggested may be doubted. They are,
as a rule, in debt, — rich in possibilities, but poor in actual accumu-
lation. National banking with general redemption might, at any
rate, supply them as well as state banking, if the latter were to be
on the specie basis ; but could they under any system find their
currency plentiful if it were kept at its specie value .-' It is hard
to see how the regular course of payments, which now takes to the
commercial centres such coin, legal tender, or bank-notes as they
acquire, could fail to restrict their note circulation by drawing
from their banks their cash for remittance.^ This hardship is the

1 At a hearing before the House Committee on Banking and Currency, December
19, 1896, Mr. W. L. Royall, of Richmond, Virginia, presented his views : —

" Mr. Royall. I say that, if you put out notes in a backwoods community that are
good at par in New York, those notes will leave the backwoods community, and go to
New York. . . .

" Mr. Johnson. Must not those notes suffer a discount when the holders of them
want to go outside of their own community to make purchases with that money in their
pockets ?

"Mr. Royall. No, sir : those notes are payable in coin on demand. They go to
the bank, and say, 'Give me gold for these notes;' and they get gold."

And again, favoring the issue of notes by state banks, —

" Mr. Royall. If [a bank] issues currency at all, it is for the convenience of the


natural consequence of economic conditions which for the present
keep their demands for certain commodities constantly in advance
of their means of payment. Nevertheless, good policy and fair
dealing alike require that whatever opportunity may in fact exist
for affording either the present or an increased supply of currency
should be enjoyed first by banks upon the spot. If the lack of
active circulation remains as at present, the nature of the difficulty
will at least be clearer than it is now, and will be obviously free
from the present appearance of unjust discrimination. Moreover,
to give to local banks all possible encouragement for natural devel-
opment, by enabling them to use as far as safety will allow the
power of issue, notoriously needed in immature communities more
than in the mature, is the readiest way to promote the growth of

Online LibraryCharles Franklin DunbarEconomic essays → online text (page 26 of 40)