in these islands and branches in the United States. It is suggested that the proposition to allow branch banking might affect seriously the operation of the banking system at home, unless the proposed extension were limited in such a way as to apply only to banks engaged in business outside the United States and to the sort of business within the United States which is carried on between the United States and other countries. Without expressing any opinion, therefore, as to the wisdom of branch banking in general, we suggest that it be authorized in respect to these islands, and that if Congress be opposed to its further extension, branches of national banks within the United States and of national banks organized here shall not be allowed to conduct the domestic classes of business chiefly represented by domestic bills of exchange and by advances upon securities. This limitation ought to be sufficient to prevent the fear on the part of any bank of the United States that its local business would be impaired or obstructed by branches of American banks doing business chiefly outside the United States or doing foreign exchange business within the United States.

If the Spanish-Filipino Bank should be restricted in its issue of paper currency, as we think it ought to be, to $1,500,000, the amount of its capital, that sum will represent the only issue of paper money in the islands; and that sum, together with such paper currency of the United States as remains here, is insufficient to meet the present needs of the country. It is obvious, from the difficulty encountered by the Spanish bank in withdrawing its notes and from other facts that this limit of paper credit must prove inadequate to the business needs of the islands. It appears also from the high rate earned by money when loaned at interest, and from the declarations of leading bankers, that circulating notes are not likely to be issued, even if authorized to be issued, by national banks of the United States, when such banks are required to invest their capital in United States bonds as a prerequisite to the privilege of issuing. Some of the disbursing officers of the United States Army here have encountered difficulty in keeping their deposits in the English banks, because those banks have been unwilling to invest in the necessary bonds required as security for such deposits in view of the small returns upon the bonds and the high rates for money when loaned or invested in other ways.

We therefore recommend that, if national banks are permitted to enter the Philippine Islands and to establish branches here, they be given a reasonably elastic power of note issue which will meet the needs of an undeveloped country and a growing demand for currency. It is not proposed by the government of the Philippine Islands to issue paper of its own or to ask for authority for so doing, except certificates for coin. We believe that the volume of paper currency can best be regulated by the needs of trade through banks of issue. It is

not necessary to abolish all safeguards for the security of bank notes, if the requirement is modified that bonds be deposited in full for the amount of notes thus issued. Reasonable safeguards would apparently be thrown around such notes by making them a first lien upon the assets of the issuing bank, except a lien in favor of the United States and the Philippine government for their money in the custody of the bank. It may be desirable also to continue the requirement that national banks shall deposit in the Federal Treasury a certain minimum amount of United States bonds and that these bonds may be counted as a part of the security for circulation. A small tax upon circulation, which should be applied to a safety fund for the protection of notes of failed banks, would add an additional bulwark to a limited issue of notes upon the credit of the issuing bank.

More important in some respects than these positive safeguards would be the restriction of the power to issue notes to banks of large capital. Large banks would be much more potent than small ones in dealing successfully with the conditions in these islands. Transactions in merchandise from the United States, in the encouragement of new enterprises, and in the shipment of native products are likely to be upon a large scale and to solicit the aid of capital in large amount. A large bank has advantages in the character of its management, the greater experience of its officers, and in the power to command aid. from the other great banking institutions of the world over local banks without such connections and risking their entire credit upon loans in a single community. It therefore seems undesirable that any bank with a capital of less than $500,000 in gold should be permitted to issue circulating notes or to establish branches in these islands.

If a system of branch banks is authorized with the power to issue circulating notes, it is recommended that the Spanish-Filipino Bank should be brought under similar regulations. This might be done by a grant by Congress of general and unrestricted authority to the government of the Philippine Islands to regulate banking. It is probably desirable, however, in view of the claims of the Spanish bank, under its existing charter, and the possibility that such claim might become the basis of legal controversy, that special provision should be made by act of Congress applying directly to this bank most of the regulations regarding the issue of notes which may be made to apply to the issue of national banks. Most of the regulations could be adopted by the Spanish-Filipino Bank without difficulty, except that it would probably be desirable to authorize the note issue to remain to the full amount of its paid-up capital, even if American banks are limited to a smaller percentage. The Spanish-Filipino Bank is a local institution, long established, and is entitled to be treated with the same consideration that applies to all other enterprises of importance that have long been established here.

The difficulties which have been experienced both by disbursing

officers of the Army and Navy and by the Philippine treasury in dealing with exchange and handling funds of officers, soldiers, and civil employees suggests that the insular treasury be placed upon a permanent footing. This can be done under the general authority of the commission if their authority to maintain a civil government is ratified and continued by Congress. The insular treasury is not at present a subtreasury of the United States, and its relations with the Treasury of the United States are informal. It is probable that convenience will dictate some exchanges and transfer of funds between the insular treasury and that of the United States. It is therefore suggested that specific authority be given the Treasurer of the United States to receive deposits in money and to engage in such transfer operations with the treasurer of the Philippine Islands as may suit their mutual convenience without confusing their separate relations toward their respective governments. The repeated complaint of disbursing officers of the Army and Navy that they can not find a legal depository for their funds in these islands would no longer be well grounded if authority were granted to them by act of Congress to treat the insular treasury as a depository. This would add something to the cost of conducting the insular treasury, but if the actual expenses of transferring funds between the United States and the Philippines were defrayed by the Government of the United States the additional expenses would be assumed without prejudice by the insular government.

NEED FOR A MORTGAGE BANK.

One of the needs of the agricultural portions of the islands which was most strongly and repeatedly set forth during the tours of the commission through the provinces was an agricultural bank. The belief was widespread that such a bank would greatly stimulate the revival of agriculture in the Philippines, which has suffered much by insurrections, the death of cattle from the rinderpest, and the deterioration of seed through the lack of proper tools and methods of culture. Again and again the wish was expressed by the local presidentes and by private citizens that aid should be extended to the small farmers, even if it was done at the expense of the Government. The commission is not prepared at present to recommend the establishment of a mortgage bank, owned and conducted by the Government, and it recognizes the danger of locking up the assets of a commercial bank in landed securities. There appears to be no reason, however, why a mortgage bank, organized according to the methods which have been thoroughly tested in Europe, should not be established in the Philippine Islands. The rate of loans upon mortgages in the islands is extremely high, especially in the sugar-growing districts, and the introduction of improved machinery, by means of cheaper money, would greatly add to the volume of the products and the earnings of the country.

The initiative in creating a mortgage bank must necessarily come from the owners of private capital if such bank is not established and endowed by the Government.

The commission believes that authority should be granted to charter such banks, under proper safeguards. The authority might be conferred by a general grant of legislative power to the government of the Philippine Islands, without restrictions of any sort; but in order to give the assurance that proper safeguards will be thrown around investments of capital in this manner, if for no other reason, we believe that Congress should lay down by some law some of the conditions governing the organization of such banks. For this reason we recommend that Congress provide directly for the creation of mortgage banks, but that they shall be required to have a capital of not less than $250,000; that they shall not be permitted to loan over 10 per cent of their aggregate resources to any one person or corporation nor to loan over one-third of the market value of the property pledged, as determined by some impartial board, to be established under the authority of the Government.

If a large commercial bank is established in these islands, with branches extending throughout the world, it would not be beyond the bounds of prudent banking policy to permit such an institution to set aside a limited portion of its capital for mortgage business. It is a sound rule of banking that a commercial bank should keep the bulk of its resources in a quickly convertible form. This is especially the case where the bulk of its obligations consists of deposits payable on demand. In the case of a large bank, however, with a capital of $1,000,000 or more, the limit of safety would not be infringed if 25 per cent of its capital were permitted to be loaned upon mortgages. The remaining three-fourths of the capital would be available to strengthen the current assets in meeting emergencies and the demands of the depositors. The rule that a small percentage of capital may be set aside for mortgage or agricultural loans, when such business is kept separate from commercial loans and is conducted with prudence, is recognized by many economic writers and is supported by the example of several of the large European banks, notably the AustroHungarian Bank and the Imperial Bank of Russia.

It might easily happen, in the absence of sufficient information to attract an independent mortgage bank to the Philippines, that a large bank established here for other classes of business would see the benefit of setting aside a portion of its capital for such a purpose. We recommend, therefore, that authority to do mortgage business within certain limits be granted to commercial banks with a capital of $1,000,000 or more, under substantially the same restrictions as those which may be imposed upon banks devoted wholly to loans upon mortgages.

GENERAL CONDITION OF THE TREASURY.

The general condition of the insular treasury is highly satisfactory. On the 1st day of September, 1900, when the commission first assumed legislative power in relation to income and expenditures, there was in the insular treasury, available for appropriation, the sum of $3,023,834.294, gold values, on the basis of $2 insular currency for $1 in United States money. At the date of our last preceding report, November 30, there was in the treasury available for appropriation the sum of practically $2,500,000 gold values, the commission having in the period intervening between September 1 and November 30 made large appropriations for general improvements, particularly one of $1.000,000, gold, for building of roads under the supervision of the military government, and another of $1,000,000, gold, for carrying on the improvement of Manila Harbor. At the date of this report, September 30, 1901, there is in the treasury, available for appropriation, the sum of $5,106,518.46, gold values. Meanwhile all the expenses of the insular government have been met, and very large appropriations have been made out of the insular treasury during that period for purely military and naval purposes. It is only a reasonable and conservative statement to say, that under any proper management of the finances of the islands, the revenue will be at all times sufficient to meet all ordinary expenses of good administration and to make considerable appropriations for large general improvements and the erection of public works. In the ordinary current expenses of the islands we include, for the purposes of the statement now made, the establishment and maintenance of an efficient police system for the preservation of good order, and of necessary means of communication between the islands for transportation of mails, public officials, and revenue customs inspection. There is no reason why the Government of the United States should ever be called upon to contribute toward the support of the insular government, and within a comparatively few years after the complete restoration of good order it is entirely reasonable to anticipate that the revenues of the islands will be sufficient to pay all expenses incurred for troops, native or American, and insular police sufficient to maintain good order throughout the whole archipelago.

In addition to the treasury balance above stated are the three following items, which practically are treasury assets:

1. Loans to provinces under act No. 134

2. Money loaned to provinces under act No. 196.

3. Portable property purchased from insular funds by the military government and transferred from the property returns of the insular government to the army returns, by virtue of General Order, No. 65, Division of the Philippines, issued April 4, 1901, and General Order, No. 38, office of the military governor, issued May 11, 1901, upon the basis of low valuations stated by the transferring officer..

$55,000.00 25,000.00

638, 573. 61