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James Selwin Tait.

National banks and government circulation retrospective and prospective online

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"of circulation in 1884 was distributed among a
"population of about 14,000,000, and thus aver-
" aged nearly 21s. 6d. per head, whereas the circu-
"lation of 11,300,000 in 1887 was distributed
"among a population of about 23,000,000, and
" averaged less than 10s. per head."

This country is now probably at that period in
its history when it requires its maximum of circu-
lation. The entire area of the country is covered
by trade, however sparsely, and needs likewise to
be covered by circulation. With the development
of commerce, greater transport and increased bank-
ing facilities will probably be found to lessen the
necessity for so much currency. Meantime, and at
this juncture, the writer is disposed to support
the assertion made by some able and qualified



19

writers, that a circulation of $2,000,000,000 would
be the proper currency equipment of this country.

Turning to the question of the Government issue
of silver currency, at which the National Banks ap-
pear to glance askance, the writer will endeavor to
make his. views on the subject intelligible. We
have obviously failed to convert the dull intelli-
gences of Europe to our views on bi-metallism, and
if we did not succeed in inducing them to monetize
or remonetize silver when we had little of the coin
on hand, and accordingly appeared more disin-
terested than we do at the present time, and when
the intrinsic value of the coin approximated to its
face value, our case, it is to be feared, would not
have appeared to improve in their eyes, were we to
say to them now, you must remonetize silver be-
cause we have so much of it on hand in coin and
metal in our vaults and because our coin is only
worth 74 cents on the dollar intrinsically. The
foreign market, therefore, has certainly not grown
more hopeful of recent years. It is, however, dawn-
ing upon America that she can live without being
much concerned with European bi-metallism. If
the Treasury will convert its present willingness to
pay for its own silver dollars with gold dollars, into
an absolute promise to do so, depreciation ceases
once for all. On the basis of such a proposition,
the writer makes the following suggestion :

Assuming that neither the population nor the
commerce of any country determine its proportion-
ate circulation, (an assumption amply and strik-
ingly justified by the experience of Great Britain,



20

where the circulation does not respond at all to the
growth in population or commerce), but that area
and the question of established credit are more
important factors, it will be fair to assume that
the sum of $2,000,000,000 as a circulation would
be needed to meet the requirements of this coun-
try at all times, including periods of panic. The
suggestion then is, establish a circulation as fol-
lows :

(1.) A coinage of . . . $2,000,000,000
consisting approximately of 2-3
gold and 1-3 silver, as the basis
of a circulating medium, compris-
ing ....

(2) A paper currency se-
cured by gold . . $800,000,000

(3.) A silver currency
payable in gold . 600,000,000

(4.) Gold coin . 600,000,000

$2,000,000,000

(5.) The issue of small notes under $5 to be dis-
continued and no gold coin less than $5 to be
issued.

(6.) The profit on coinage of $600,000,000 silver
which would be upwards of $100,000,000, if the
balance of silver requisite to coin that sum were
to be bought at current rates (say 74 cents)
if specially invested at 3 per cent, for the benefit
of the circulation, would amount at compound in-
terest in 25 years to $209,000,000, and be more than
sufficient to make up the par value of the dollar if



21



the Government had eventually to sell the old
coins as bullion.

(7.) Assuming the worst imaginable panic, if
there were no issue of small notes and no gold coin
of less value than $5, this silver circulation never
could be presented for payment to any extent, as
the people would need it for daily use, so that the
integrity of the silver dollar would be maintained:

(a) Because it never could be presented in quan-
tity ;

(b) Because the holder would never apply for
gold if he knew he could get it at any time ;

(c) Because the law of averages would always
leave enough gold to meet it ; and,

(d) Because the compound interest on the seign-
iorage would be building up an ample fund to meet
any conceivable deficiency.

In passing, the writer would say that such a
course would bring the silver coin into the market
and subject it to abrasion and loss, which would be
better than that it should be rendered immortal by
(metaphorically speaking) being wrapped up in
tissue paper and stored away in the Treasury
vaults. In this suggestion the writer premises that
the Government would take the earliest opportunity
of providing a metallic basis for its legal tender
notes.

Since penning the foregoing suggestions on the
currency the writer has noticed the opinion on the
same subject of one of the brightest and, most re-
liable lights that ever illuminated the Treasury De-
partment,



22

In Ms Annual Report to Congress, dated 7th
December, 1885, the late ex- Secretary Manning
says:

1 1 Currency reform is first in the order of impor-
tance and of time, and fitly precedes other reforms.
. . . . Such a reform of the whole currency of
the United States (setting aside the National Bank
notes which are diminishing and well secured) can
be undertaken and finished subject to the following
conditions :

"THE CONDITIONS OF CURRENCY REFORM.

"1. Without shock or disturbance to the indus-
tries, the business enterprise, the domestic trade or
foreign commerce of the country.

" 2. Without degrading the United States mone-
tary unit of value to a cheaper dollar, and without
raising the United States monetary unit of value to
a costlier dollar.

' ' 3. Without Joss to any who now hold the prom-
ise of the United States to pay a dollar.

u 4. Without reduction of the present volume of
the currency, or hindrance to its free increase here-
after, when every dollar note shall be the certifi-
cate of a coin dollar in the Treasury payable on
demand.

"5. Without pause in the reduction of the public
debt, but paying more than three-fifths of all that
part of the debt now payable at the option of the
United States prior to September, 1891.

" 6. Without increase of taxation.



23

"7. Without the sale of any silver bought and
coined since February, 1 878.

" 8. Without the disuse of the 215,000,000 coined
silver dollars of unlimited legal tender, or any fall
or discount in their present received value ; and
without the disuse of the 550,000,000 coined gold
dollars of unlimited legal tender, or any rise or
premium on their present received value.

"9. Without prejudice to the adoption hereafter
of an international bi -metallic union, with free
coinage of both metals for all comers, at a fixed
ratio of weights, into coin of unlimited legal
tender.

"10. Without the coins of the two metals parting
company from each other, whatever may be the
temporary fall, if any, in the market price of sil-
ver bullion after stopping Treasury purchases.

" I would most respectfully commend to the con-
sideration of Congress the question whether such a
reform of the currency ought not now to be endeav-
ored ; whether these are not among the prudent
and just conditions of its reform, and whether
such a reform might not be promoted, with imme-
diate advantage to all our industries and trade, by
repeal of the clause requiring Treasury purchases
of silver bullion, and repeal of the act making com-
pulsory Treasury issues and re-issues of the legal
tender notes."

In the writer's judgment, Mr. Manning suggests
the only sound, economical and dignified course
open to the government of a great country such as



24

this is, when he advises "a currency in which every
" dollar note shall be the representative certificate
" of a coin dollar actually in the Treasury and pay-
" able on demand." He again adds, as if to em-
phasize its importance, "in which our monetary
" unit coined in gold and its equivalent coined in
" silver shall not be suffered to part company."
The fact that this country was fortified by a circula-
tion such as has been suggested by the writer would
be of enormous service to the community in time of
international trouble. While designed for the uses
of peace it would be better than Germany's military
chest in times of war should such ever arise and
if foreign countries knew that they could always
obtain, under any stress of circumstance, a gold
dollar in exchange for a silver one, the latter would
always remain with them, as a mere token or ex-
pression of gold value, so that the gold standard
for the silver currency would be maintained in its
integrity.

But let us consider the other suggestions made,
in and out of Congress.

In his annual report to Congress for the current
session the Comptroller of the Currency states that
more than forty plans have been proposed to him
as a new basis for circulation. These he reduces
to five and subsequently to one, when he says that
the fifth proposition alone seems to contain a prin-
ciple likely to be both acceptable and practicably
effective. "This principle is, that while preserving
"all the other features of the system, the main
"volume of the currency should rest upon the



25

" credit and resources of the banks and not upon
" the credit of the Government, with the reservation
" that whatever new legislation is proposed should
"be additional to, and not in repeal of, existing
"laws as to the deposit of bonds, whether obliga-
" tory or optional, and as to the privilege of issuing
" currency to 90 per cent, of such deposits. "

In considering this proposition the Comptroller
alludes to the fact that the proposed issue of notes
would constitute a first lien upon all the assets of a
failed bank and draws attention to the difference
between such a lien and that at present exacted by
the Government, which is a security for only the
deficiency between the proceeds of the deposited
bonds and the outstanding circulation, a deficiency
which has never occurred <ind, in the present state
of the market for United States bonds, is not likely
to arise. He accentuates the fact that the prefer-
ence thus secured to note-holders over depositors
of the National Banks has never been enforced and
its legal existence has never affected the general
credit of these institutions. In the case, however,
of an issue not specially secured, which in the
event of insolvency must be redeemed wholly out
of the. general assets, the effect caused by the ex-
istence of such a lien must affect unfavorably the
minds of depositors. In this relationship he refers
to the enormous amount of individual deposits in
the National Banks which would be influenced by
any such prior lien given to the note-holders. Few
people will be disposed to question the correctness



26

of his deductions as reported in the following
words :

"The issue of preferred notes to the amount of even 25 per
cent, of the capital, the lowest limit proposed, would be a serious
matter to depositors, while such issues to the amount of 50, 75,
and 100 per cent, of capital, as some suggest, would probably
cripple fatally the general credit of the banks with prudent
depositors, and in that way their means of accommodation
would be curtailed in a ratio greater than the increase of such
means derived from the additional issues of currency. It is
much more important to the banks as a body to retain and
augment their deposits than to acquire the power to issue more
currency, and the public have even a greater interest than the
banks in the preservation of this condition of things, because
the credit that attracts deposits is always better founded than
that which floats currency, and is always more jealously guarded
by the banks enjoying it, and it is, therefore, less liable to be
abused. The conclusion reached is fatal to aJl schemes of estab-
lishing a bank currency secured only by a first lien upon all the
assets of the issuing bank, unless some sufficient counterpoise to
the objections can be found among the various suggestions as
to a 25 per cent, reserve, a sinking fund deposited with the
Government, the consolidation of all issuing banks into one
association, &c."

One of the best conceived plans in advocacy of
the circulation based on credit which the writer
has seen is that suggested in his pamphlet by Mr.
John Thompson, Vice-President of the Chase Na-
tional Bank, who is recognized as an able authority
on such subjects. Mr. Thompson's plan is briefly
that the banks should discontinue the deposit of
Government bonds as security for currency should
be empowered to obtain currency from the Treasury
Department equal to fifty per cent, on their paid up
capital, such issue to have a preferred lien on the
entire assets of the bank, including the individual



27

liability of the stockholders in case of insolvency,
and that the annual internal revenue tax of one per
cent, per annum on circulation be converted into a
guarantee fund for the benefit of the currency. In
support of his views, Mr. Thompson quotes extracts
from the report to the Congress of 1885 by the then
Comptroller of the Currency, Hon. H. W. Cannon,
now President of the Chase National Bank. Ex-
pressions from such influential authorities in favor
of a credit currency are entitled to full consider-
ation, and it is with some degree of diffidence that
the writer ventures to criticise them. The one stu-
pendous disadvantage of an issue based on the
credit of individual banks lies in the fact that, for
one central source of issue of the circulating me-
dium of the country as it at present exists in the
United States Government, it proposes to substitute
a large number of small establishments of issue
which already amount to upwards of 3000, and
would in time probably amount to 10,000. When
the enormous territory covered by these banks is
taken into consideration and the terrific onslaught
reasonably to be expected on them during a period
of acute panic, it must be admitted that the pros-
pect of the formation of such a long, thin line of
units of issue of irregular strength is nothing short
of appalling ; more particularly when it is remem-
bered that a single failure would bring discredit
upon all issues, and probably convert the objec-
tionable line into a row of ninepins, where the fall
of one would endanger the standing of all. The
integrity of such a conglomeration of issues, it



28

must be confessed, would be likely to compare
very unfavorably with the security of the existing
currency emanating from and not only guaran-
teed, but in extremity payable, by the Govern-
ment which holds against it what is tantamount
to cash.

It is very conceivable that any Government would
shrink from the vastly increased responsibility in-
volved in the inspection of banks which have
changed from a cash to a credit circulation with
its additional exposure to discredit and its attend-
ant dangers from overtrading.

From the depositor's point of view there are
also grave objections to this currency-upon-credit
system, which means that the National Banks
shall, at the outset, be saddled with a first
mortgage, and that both stockholders and depos-
itors shall in future assume greater risks in bank-
ing ; for cipher it as one may, it is impossible to
add from two to three hundred million dollars to
the currency of a country on credit and not ma-
terially increase the risks of the banking system
responsible for it. Upon investigation too, this
proposition, while designed to ensure the safety of
the circulating notes and in reality weakening the
position of the depositors and stockholders in order
to do so, does not materially help the note-holder.
Let it be assumed, for instance, that a rumor were
to arise affecting the credit of a note-issuing bank
in a populous center, and it is quite safe to say
that the bulk of the depositors would have caught
the alarm and have withdrawn their money, clear-



29

ing out the bank in the process, before even the
first holder of a note had discovered that he had
one in his possession ; and it would be just as bad
for him to have the value of his notes locked up
awaiting the liquidation of the bank, as if he were
a depositor.

In a country town where there are only one
or two banks of issue, the difference between
each bank's notes is remarked; whereas, in large
cities, it is never noticed. Therefore, this prop-
osition may be said to increase the risks of the
depositors and stockholders by tending towards
overtrading by means of a first lien, which, while
designed to benefit the holder of the mortgage or
bank note, does not really do so, as, for the reasons
assigned, it enables the depositor 10 obtain an ad-
vantage over him as long as the bank can pay cash.

The very important feature of the surrender of
the Government tax of one per cent, for the estab-
lishment of a note guarantee fund would no doubt
go far to obviate the danger of loss to the stock-
holders, though not to remove the stigma which
the failure of one bank would still entail to the en-
tire system. The number of National Banks which
failed last year was eight, the average for the last
four years was the same.

It is clear that if this average was maintained, as
it is certain to be, we should have banks whose
notes were discredited (at the outset even if paid
eventually) during the first year of the new ar-
rangement. The Government, however, which has
all along had its one per cent, on the circulation,



30

and has, it must be confessed, well earned it, would
not consent to a surrender of it in toto. It is not
reasonable to suppose that any Government should
agree to exercise so wide, so exacting, and so re-
sponsible a censorship over a wealthy body, and
run the risk of showing a loss resulting therefrom
to the department exercising the supervision. It
is indeed very intelligible that a careful Govern-
ment should impose a tax such as would bring a
fair share of revenue since the banks have really no
more right to make a profit out of circulation than
any other commercial enterprises have. The profit,
if any, belongs to the people or to their represen-
tative, the Government. And here it is to be
remarked that the present Comptroller suggests
a modification of the tax. The necessity for such
a modification is not very apparent, but the possi-
bility of it indicates a weakness of one of the props
on which Mr. Thompson' s proposed fabric was to
be built. In all the circumstances of the case it is
hardly possible to conceive that Congress will
emasculate this tax to any extent, even for such a
desirable purpose as the formation of a fund to
guarantee the note issue ; and there is the danger
that, even if the Government agreed to the propo-
sition, a panic might exhaust the fund in its in-
fancy when it is quite safe to say that the holders'
delay in realizing as the first creditor would be al-
most as ruinous as a total loss ; for the delay in
payment during panic is as bad as actual loss.

On the surface of this proposition too, lies this
difficulty : Is it not calculated to restrain freedom



31

in banking ? Assuming, for instance, that the Na-
tional Banks in existence had built up a guarantee
fund of say $5, 000, 000, upon what principle, if any,
would they be prepared to allow new banks admis-
sion into the fund?

The Hon. John Jay Knox's proposition was the
accumulation of a safety fund, first from the gain
arising from the accidental loss or destruction of
the circulating notes of National Banks ; second,
from the tax upon the circulation ; and third, from
interest to be derived at a low rate upon the fund
on deposit in the treasury for the purpose of redu-
cing notes of National Banks retiring circulation,
which now amounts to $39,000,000. The amount
available for a safety fund from the first source was
estimated in 1885 to be not less than $6,000,000 ;
and the amount derived from the tax for safety
fund taxes, even if fixed at one-half per cent., in
the course of three years, the safety fund on hand
would amount to more than $10,000,000.

While this plan appears to suggest good security,
it has the disadvantage, already alluded to, of lim-
iting the freedom of banks to be formed subse-
quently.

Mrs. Glass's well known recipe for cooking a
certain rodent "first catch your hare" would
appear to be applicable here, since it is very doubt-
ful indeed if the National Banks would be per-
mitted to avail themselves of any of these funds.

Apparently the most popular as well as the most
recent suggestion is the proposition to make the
issuance of bank notes optional with the banks



themselves and to maintain the latter' s relations
with the Government by the deposit of a nominal
sum (say $1,000) with the Treasury. Of this it
may be said that if Government supervision is ab-
solutely imperative, and a device is necessary to
maintain it, this is probably as good as any other.

But why this undesirable air of "tinkering"
this currency problem? Why not go direct to
Congress and obtain the needful powers compelling
Government supervision, if such is desirable ? As
already expressed, the writer does not think that
it is but on the contrary protests that it is un-
business-like and unconstitutional. It is time the
National Banks were out of the Government's lead-
ing strings, which, however needful once, are no
longer necessary now. Circumstances are already
cutting away these evidences of infancy, and it
would better consort with the dignity of the banks
to let them go without demur.

It seems to the writer that the National Banking
system has now reached a stage when Government
supervision is not only unnecessary but harmful,
both to the banks themselves and to the public.
To the banks, because once they have passed the
very superficial scrutiny of the official examiner,
the directors and officers are prone to think that all
is well, and to relax their vigilance and so fall short
of that degree of excellence of management which
it is possible they might attain to if their standard
were a higher, or a rising, one ; because, also, they
grow to lean upon the Government, and are apt to
lose that courage of conviction, and prompt deci-



33

sion of judgment which are as necessary to a banker
as ceaseless watchfulness and uniform prudence.
How many directors have neglected their duties,
using the Government Inspector as a sentinel to
notify danger, and intensifying their neglect with
every round which he completed without an alarm
being sounded? One very common instance of the
harm likely to result to the banks under such
supervision will suffice. If a banker has any trans-
action on his books as to the safety or propriety of
which he is doubtful, and if that transaction is
passed by the Examiner without comment, the fact
that it has so been passed will either lessen the just
doubts of the banker as to its safety and so breed a
degree of confidence unwarrantable in the circum-
stances, or, in the case of an irregularity, embolden
him to increased acts of banking impropriety.

The moral effect of an official examination is
rarely negative and nearly always positive dis-
tinctly baneful if not manifestly beneficial.

It is hurtful to the public because the latter
regard the official inspection as a Government en-
dorsement of each individual bank a clean bill of
health, equally free from fraud and mismanage-
ment, a perfectly monstrous idea when the super-
ficial character of the examination is considered,
and a grotesque one when the long continued
iniquities which cause so many bank failures are
borne in mind.

There comes a time when it is necessary to take
away his crutches from the invalid in order to
ensure that he regains the full and perfect use of



34

his limbs, and the present appears a favorable hour
in which to perform that ceremony for the National
Banks.

In saying this no shadow of aspersion is cast on
those who introduced this supervision as a corollary
to the National Banking system. It will indeed be
seen by the following quotation from the Report
(Dec. 1887) of the Comptroller of the Currency that
the original design of those who insisted upon it
was widely different from what it is commonly sup-
posed to have been.

"It would appear that the supervision of the National
banks by the Comptroller of the Currency was intended origi-
nally only to protect the Revenue from being defrauded and the


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Online LibraryJames Selwin TaitNational banks and government circulation retrospective and prospective → online text (page 2 of 4)