United States. Congress. House. Committee on Banki.

Banking and currency reform. Hearings before the subcommittee of the Committee on banking and currency, House of representatives, charged with investigating plans of banking and currency reform and reporting constructive legislation thereon ... online

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printed in full, as follows:

IThe following paper was submitted to the convention of the American Bankers' Associ-
ation, which was held at Chicago, Sept. 2" and 24, 1883, and ordered to be printed
with its proceedings.!

Security for National-Bank Deposits.
[By W. W. Flannagan, cashier of the Commercial National Banlt, New York.]

Twenty-five years ago, if it had been proposed, in the abstract, to organize a
system of banking whereby the circulating notes of banks, no matter wliere
issued, should pass at par from Maine to Florida, and that not only the notes
of solvent banks should thus pass current, but the notes of insolvent banks as
well, the most experienced and wisest banker, under the State system then in
vogue, would have pronounced it impossible.

Familiar as we are to-day with the national banking system, which has gradu-
ally developed this result, there appears to us nothing strange in this state of
facts, and we only wonder that we endured the evils of the prior system for
more than 50 years.

Under the State system (with the exception of New York, Louisiana, and
IMassachusetts) we had no real security for bank circulation, and to keep the
issues of the banks afloat seemed to be the difficulty of the managers of that
-day. They experienced no difficulty in the payment of their depositors as long
i,is provision was made for their circulation, for with the latter, either directly
or indirectly, they managed to prevent the former from feeling any uneasiness.
Bank failures came from inability to redeem circulation, not from inability to
pay depositors. Now, under the national banking system, failures never come
from inability to redeem circulating notes (because their redemption is never
■demanded), but exclusively from inability to pay depositors.

To-day the practical question arises : Can we not take another step forward
in the improvement of the national banking system whereby the same con-
fidence which now exists in the mind of the holder of a note shall also exist



with «ie'olberv \^:^^T-"''- f "" '^"* rT""^^^' ^^'^ °°<^ ^^>«11 I^^ equally secure
«im tne othei .' iins being done, we shall have no more runs on natioml hnnko

Zrol^w'V"''"'^ ''"' ^•*'"^" °^ '^« f-^"!' of lo«« theiefrom,rciSg house
Joan certificates, no needloss failures of national banks wlii -h nfWwn.Sr

300 cents on the dollar from assets: but faUure on"y as ti^^ result oJmim^an^
agement or fraud, which, when they occur, will be isolated and will not iuTOlv;
others m the.r rum, as is now so frequently the case, it being fhrnatTralTesul?
of our complex and closely Interwoven system of credit natural lesult

To my mmd the solution of this question is intimately connected with the t-ix
collected by the United States from national banks on their c^^^ulat on

The abolishment of this tax has been urged upon Congress by this associ-
ation and approved in an official report of the Comptroller of the Curiencv •
but to-day we seem to be no nearer the accomplishment of this end than when
the question was first mooted. If we say that much has been accomplished in
the abolishment of the tax on capital and deposits, we are answered by the
opponents of the system that that is true, and that it is a sulHcient relief that
we are now paying a tax on a franchise, and that if we don't like it we can
relieve ourselves by declining to exercise the franchise ; that is to say declin-
ing to take out circulation.

This is true, and it is unanswerable. We show by figures that there is no
profit m circulation, but we are met with the fact that there are $317 000 000
outstanding. t , , ^

If the entire abolition of this tax is not conceded, it is possible, considering
the redundant and unnecessary revenues of the Government, that Congress
would agree to utilize the fund paid by the banks on account of this tax for
the perfection of the national banking system, so that in the future when we
have paid into the National Treasury a sufficient amount to secure all the
creditors of such national banks as may hereafter be placed in the hands of a
receiver, we may have a cessation from this onerous tax, not required by the
necessities of the Government, until it is again needed for a similar purpose.

The following table will show, year by year, the amount of tax on circula-
tion paid by national banking associations, the amount of claims proven against
insolvent national banks, and the amount of such claims remaining unpaid
(omitting cents), beginning with 1865 and including 1884:

Year of failure.





Tax on cir-
culation of


SI 22, 089






3, 193, 570






















124, .587




3, 404, 483

























By assuming that those banks which have been in the hands of a receiver
as long as 5 years will pay nothing more, and those which have not been for
this period in the hands of a receiver will average as large a percentage of
dividend to creditors as the failed banks for the 15 years previous, we have the



following approximate table, showing claims proven against insolvent national
banks, actual losses thereby, and taxes paid on circulation :

InsoJient iintionnl banlcn. .

Year of failure.



Tax paid on

1866 to 1880, inclusive




522, 332






1, 308, 239










From this table we may deduce some curious facts :

1. The taxes paid each year to the Government on circulation have been
much more in every instance than the losses for the corresponding year by
depositors in national banks.

2. The taxes paid on circulation since 1865 exceed by more than 50 per cent
the total amount of proved claims against insolvent national banks for the same
time, so that if the insolvent national banks had had no assets whatever this
tax would have paid all their depositors and left $19,877,181 in the Treasury
excluding interest.

3. The taxes paid on circulation are more than six times the losses incurred
by the public from insolvent national banks, and if these taxes had been applied
to the payment of such losses as is contemplated by the bill which we shall
suggest, such losses would have been paid in full and the fund remaining would
amount to 148,832,438. disregarding accumulated interest.

It must be borne in mind, also, this tax is not the total amount already paid
In the way of taxes to the Government by the national banks, but. including
tax on capital and deposits, the amount reaches (not including 1885) the enor-
mous sum of $127,038,610, which is more than 3 times the total ,'imount of
claims against insolvent national banks and 13 times the amount of losses

To carry out these views the following bill is suggested :

AX ACT To limit the taxation of the circulating notes of national banking associations,
and to provide for the security of the deposits therein.

Be it enacted bp the Senate and House of Representatives of the Uniied States
■of America, in Congress assemliled :

1. That the amount which shall hereafter be collected from national banking
associations, under the provisions of section fifty-two hundred and fourteen,
Kevised Statutes, on account of the semiannual dutv on notes in circulation
issued thereby, shall be held and kept by the Treasurer of the United States as
a separate and distinct fund, to be known as the guarantee deposit fund.

2. That whenever said fund, thus collected, shall amount to as much as the
^um of twenty millions of dollars at the end of any semiannual period, then
the tax or semiannual duty on such circulating notes, imposed by said section
fifty-two hundred and fourteen of the Revised Statutes, shall be inoperative
until the said fund shall be reduced below the sum of fifteen millions of dollars,
as hereinafter provided.

3. That the amount of said fund in excess of one million of dollars may from
tiine to time be invested in the interest-bearing bonds of the United States,
under the direction of the Secretary of the Treasury, which bonds shall be reg-
istered in the name of the Comptroller of the Currency, in trust for the guar-
antee deposit fund, and held in the possession of the Treasurer of the United
States. The interest on said bonds, as It accrues and is paid, shall be added to
the principal of said fund.

4. Whenever any national banking association shall be placed in the hands
of a receiver, under the provisions of the laws now in force and satisfactory
proofs of claims against said association have been made to the Comptroller of
the Currency, upon his requisition therefor, wherein all cases of mutual in-
debtedness shall have been adjusted, the Treasurer of the United States sliall


thereof, as of the^day of fiuure "f sa d naOon T' 'f^'^^^'^S to the amount
shall be the duty of the Comntioller of tho n banking association, and it

checks upon the Lid 'r^e.2T^']^'mltm!r^^'^^^^^ t° i^«"e his

claimants. In case the available cash in thrTr^n^V? k ? ^'-^'y'' °* "^^^^^ «* said
not sufficient to pay in full the amount of ,.?Zf '^^"'L''®'""^™^ *" ^'"d fund is
Currency shall transfer therefoi^rtL VreasureHf f,^^ 1^' PT^''°''^'- «* '^^
cient amount of bonds held by him in tiust lo, .nir, f ^^"'^t'^ ^*^*®^' * suffi-
vided, which bonds the said Treasurer shnll ^p 1 i?. '^' "' Jiereinbefore pro-

of said fund. iieasuier shall sell in open market for the benefit

Comp^roll^f^HL^'cSreU'te^ direction of the

is now provided by law which amount nn'. If ^*^ '" '^^"'^^t ^^'^ ^"-e as
Treasury to the credi?^f The guarZtee deDosit fnnd*^ tf .1," \''^l'' '"^^^ '""^
may have been charged with the navmen? o? tifo v', ?-.-''^ ''?®"^ "'^'d fund

years, and the similar fund for the redemption of the circulating notes of anv
banking association which has been in voluntary liquidation for the sCe
period shall be paid to the credit of said guarantee deposit fund, and hereafta'
after the expiration of five years from the appointment of a rt^eivei or the
vote by Its shareholders to go into voluntary liquidation, of any naton^l bank
tag association the fund available for the redemption of the circulaOng notes
of such national banking association shall also be paid into the Treasurvfto the
credit of said guarantee deposit fund, which fund shall be chargeable with the
circulatmg notes of any such national banking association that niay thereafter
be presented for redemption.

7. All acts or parts of acts inconsistent with the provisions of this act are
hereby repealed.

8. This act shall be in force from its passage.

Section 6 of said bill provides that the fund now in the Treasury, which has
accumulated from the nonpresentation of circulation lost and destroyed in the
hands of the people, shall also be used for the protection of national-bank

This is merely incidental to the idea here presented, though decidedly de-
sirable in the beginning, if the act is to take effect from its passage ; otherwise
there will be no fund in the Treasury to promptly meet the liabilities of any
national bank which may fail prior to July 1 or January 1 next succeeding
the passage of the bill — these dates being the periods at which the semiannual
duty on circulation of one-half of 1 per cent is collectible.

This fund now amounts to $1,60.5,.321, in the case of banks which have been
in voluntary liquidation for the period of five years, ' and to $541,182 in the
case of banks which have been in the hands of a receiver for the same period,
making a total of $2,146,503.

It was never the intention of the Government to appropriate to itself a
profit from lost and destroyed national-bank notes, and there seems to have
been an omission in the national currency act which left unprovided for the
excess of legal-tender notes deposited by a national bank for the redemption
of its circulating notes. Clearly, neither in law nor in equity does this fund
belong to the Government but rather to the note holder first, and then to the
bank which made the deposit. As it is impracticable and undesirable to fix a
limit of time for presentation for redemption, it would seem but reasonable
to let the public reap the benefit of this fund, as is proposed in the above bill.

Some objections to the plan have been suggested which it may be well to

Objection 1. — " State and private banks and bankers may object, because
the effect of the bill may be to divert deposits to national banks."

We maintain that any system which tends to add to the security of any
portion of the custodians of the funds of others, as a class, will tend to add to
the confidence in all de.serving confidence.


This bill does not lessen the security and capital otfered by State and private
banlis and bankers, nor affect the many cases in which business is the result of
public confidence in personal integrity and capacity. Besides, the national
banliing system is free to all, and if this plan makes it a more desirable system
than private or State banking, why not adopt it rather than object to .the
bettering of a system in order to retain a worse?

Ohleotion 2. — " This proposal is but a mere assumption of the banks' debts,
and a liability therefor on the part of the Government ; in other words, the pay-
ment of private debts with public funds."

To this objection it may be answered that the semiiinnual duty now levied by
the Government on the circulation of national banks is not needed for revenue.
To impose it is class legislation, and the only direct tax remaining as the result
of the necessities of war. The banks propose to continue its payment in order
to create a requisite fund forHhe security of all their depositors, and to con-
stitute the Government the trustee for its proper investment and disbursement.
It ceases to be public funds in a general sense, and would bear the same relation
to the deposits of national banks that United States bonds now deposited in
the Treasury by these same banks bear to their circulating notes, namely, a
fund to secure the general public. The present deposit of bonds is made to
secure the promissory notes of these banks taken by the people. The deposit
under the proposed bill is made to secure the depositors in these banks which
the people find organized in their midst, chartered by the General Government,
subject to its laws, and amenable to its visitorial powers only.

Objection 3. — " Bank officers, knowing their depositors are secure, would not
exercise the same care and prudence in the management of their institutions."

This is an objection on the surface merely. Bank officers are elected by theii'
stockholders, and to them have they to render an account of their management.
Usually they are large stockholders themselves. The failure of their institu-
tions means utter ruin to them, and stockholders are relieved from no liability
under the bill. The fact that their depositors will be paid will hardly be con-
sidered sufficient compensation for the loss of their position and prestige. The
laws remain for the punishment, of reckless management and fraud, and those
v\iio are now willing to incur the loss of personal fortune and personal liberty,
accompanied Avith lasting di^•s^lce, would be none the more and none the less
willing because of this bill. Their liability remains the same in every respect.

Objection J/. — " Large banks may claim that their accumulated assets will
offer no better security to depositors than small banks."

The public good ought never to be subserved to the apparent interest of few
individuals or large corporations. But, in point of fact, the objection is not
valid, because small banks can never extend the same facilities for business
as the banks at the centers of trade, and these larger banks will then be enabled
to extend more readily better facilities to their weaker customers since they
can do so with absolute safety, and in this way trade and commerce will be
promoted and capital less centralized without an outlet.

The whole matter simply is that the banks come forward and propose to
waive any further objection to the tax on circulation, as far as it may be
necessary to subserve the public good; to willingly contribute the fund which
shall create such confidence in our financial system as to prevent financial
panics, which destroy more property and entail more misery than wars and
conflagrations, and to present to the world a safer and better system of banking
than it has ever known, in which both circulation and deposits are absolutely

Respectfully submitted.

W. W. Flannagan,
Cashier Commercial National Bank, 78 Wall Street, New York.

Opinions Concebnino the Pamphlet Submitted by W. W. Flannagan,
Oashieb Commercial National Bank, New York, to Bankers' Conven-
tion, at Chicago, September, 1885.

[Extracts from some of the numerous letters .and newsp-ipers received.]

■Jlr. Horace White, New York, September 19: "It embodies, in my judgment,
a very valuable suggestion."

.T. W. Guest, cashier Citizens' National Bank, Baltimore, Md., September
23: "I have read the paper of Jlr. Flannagan with great interest, and heartily
approve the measure."


The Evening Post. New York, September 26 : " Whenever it becomes entirely-
clear that the t.ix on tirculntion can be spared, no better disposition can be
made of it than to use It for completing and perfecting the national banking*
system on the lines suggested in Mr. Flannagan's paper."

Judge Hugh W. Sheffey, president Augusta National Bank, Staunton, Va.,
September 20 : " It would render the national banking system perfect in security
if your plan should be carried out."

The Nation. New York. October 1 : " That this plan, if carried into effect,
would perfectly secure the deposits of all national banks, and relieve the public
from all apprehensions regaixling the safety of the money intrusted to their
safe-keeping, is quite certain."

Financial Review, New York, October 6 : " The measure can hardly fail to
be one of the most popular that has been proposed in financial legislation since
the origin of the national banking system."

Miscellaneous Security Report. New York, October 6 : " Should the ideas
embraced in Mr. Flannagan's paper on Security for National Bank Deposits
be followed out, there can be no doubt that a vast improvement on the present
system will be the result."

" Gen. F. H. Smith, superintendent Virginia Jlilitary Institute, Lexington, Va..
October 7 : " The scheme you present is good, and should be pressed through

John S. Mcllvnine, cashier N:itional Bank of Chambersburg, Pemi., October
7 : "It has my unqualified indorsement. Nothing better has ever been pro-
]josed toward the perfecting of the national banking system."

F. D. Kitchel. cashier Potters' National Bank. East Liverpool, Ohio, Octo-
ber 7 : " I congratulate vou on the paper, and heartily approve of it."

John N. Jacobs, cashier Perkiomen National Bank, East Greenville, Pa.,
October 7 : ■' I think the plan a practical one, and will see our Member of
Congress in relation to it." ^ . r,

W. H. Ainey, president Second National Bank, Allentown, Pa., October 7 r
" I have read' your paper, Security for National Bank Deposits. That it is
feasible and desirable will not be denied by anyone- who has given the subject
proper consideration." - „ ^ ^ ,, o

John H Kahler. cashier First National Bank, Millersburg, Pa., October 8:
" I think 'it a good arrangement, if it can be effected. I send the copy you

^*^°;ohTGarZer,Te="-;-orwalk National Bank, Norwalk Ohio, October
8: "It is the only practical plan that has been divulged, which seems to meet
the tipcessitv without being onerous to the banks." „ ^ ,

Jos^hFLarkta president Cincinnati National Bank, Cincinnati, October
8: "ft strikes me as a most admirable plan and ought to meet the approval of

^"independent New York. October 8: " The plan would promote the public

^^^IZ iL^r;Xnrfbl^kin?iri it -would grlatly improve a system

which is to-day the best the 7°^lf has ever seem ^^

John Manier, cashier First Natwn^l Bank Blnghamton ^ , ^^^^^^^

7Sr^r TTeirafe^3nf goVd Su?^s^ i'^ the^'ctrcular I wish to retain

''^rTRossla'shiei- "i'ercrnts' National Bank, Binghamton N. Y., October

9:'^^-The1.lfn i'fhrmost P-^f and -niplet^^^^^^^^ ,._

F. M. Durbin, cashier First National Bank Gratton, w ^ ^^^^^.^^

"We have perfect f '^."/'t^ ^°3„°.%^^^%'' t^e bm as presented by Cashier
.^laSa^lsno??l^e1xLt^tS.'a^dd tJ^^'d%liminate^ntil it is the exact

'^^^R. Anderson ^^a^ntB^ of Bns^ ^o.^^, Octob. ^ -

think this plan f°i^H"asPnea^ w«jt as we can make it; one that will gi e
and makes tbe system as near perreM_^^^^ ^^^^ ^.^^ ^^^^^ ^^ ^^.^^,,,

such credit to banks ^^^'i. J ^j^^^^^tion many a dollar now dormant."
and strong boxes auu i


G. F. Reynolds, cashier First National Bank, Cheboygan, Mich., October 10:
V The plan meets my hearty approval and can not fail to be of great good
to us as national banks, and to the general public as well. Should Congress
make it a law the system would be well-nigh perfect."

I. H. Foust, cashier First National Bank, Salisbury, N. C, October 10 : " If
we can not get rid of the iniquitous tax on circulation I guess the next best
thing to do would be to have it applied so as to afford absolute protection to
our depositors. It will be a ' clincher ' in the way of an argument to timid
iLnd doubting ones."

F. W. James, president First National Bank, Baird, Tex., October 10 : " W»
heartily approve it, as it would make our financial system as near perfect as
could be."

C. 0. Crecelius, cashier Fifth National Bank, St. Louis, Mo., October 10 : " It
meets with our unqualified approval. Will you please send us about a dozen
copies, that we may send them to our Representatives and Senators?"

J. M. Cornell, president Orleans County National Bank, Albion, N. Y., October
10 : " The idea Is a good one. It is quite as important to the banks as to the
depositors that they should at all times feel perfectly safe."

J. P. M.umford, cashier National Bank of the Republic, Philadelphia, Pa.,
October 12 : " If the national-bank act can be perfected to the point of the
guaranty of deposits, as well as circulation, by the tax on circulation, as pro-
posed by Mr. Flannagan. it will certainly put national banks upon a plane of
public confidence no other orpanizntinn of b;\uks can hope to reach."

E. S. Campbell, cashier National Bank of New Jersey, New Brunswick, N. J.,
October 12 : " Heartily approved."

C. P. Williams, president National Exchange Bank, Albany, N. Y., October 12 ;
" Many features of it seem to me commendable ; it is certainly a plan worthy
careful consideration."

B. B. Stamps, president State National Bank, Raleigh, N. C, October 12:
" I think it is an able production, calculated to give great stability to the
national-bank system and entirely preventive of ' runs ' in time of panic."

J. W. Alspaugh, cashier First National Bank, Winston, N. C, October 12 :
" I most heartily approve it. In my judgment it is the wisest disposition that
could be made of the tax on circulation. I have not seen for years anything
that I like so much, either before Congress or elsewhere."

J. P. Alvey, cashier National Bank of Texas, Galveston, Tex., October 12:
" I am sure were such a bill, or the purport of it, a law, the country would at
once become trustful and! prosperous again, and the national banks have the

Online LibraryUnited States. Congress. House. Committee on BankiBanking and currency reform. Hearings before the subcommittee of the Committee on banking and currency, House of representatives, charged with investigating plans of banking and currency reform and reporting constructive legislation thereon ... → online text (page 75 of 96)