only answer this question in one way. Banking made itself known to the great mass of the community only through failed bank notes. One failed bank of small calibre would make more impression on the public mind than a dozen others which never closed their doors. This is on the principle that one lost sheep gives its owner more concern than ninety-nine that go not astray. So the legislative mind, which generally follows the public mind, became exclusively fixed on security for bank notes, to the neglect of all other branches of the business.

In practice it was hardly necessary for the bank to have a place of business if its notes were secured, and I remember that in some instances where attempts were made in Illinois to present notes for redemption at the bank's counter no counter was found, but merely a hired room in some place remote from any railway station and situated on some bottomless prairie road. As the country banks had a decided advantage over the city banks in the way of nest-hiding, the latter resorted first to the device of not paying out their own notes at all, but borrowing those of Eastern banks instead. Facilities for travel were too good, however, in the East. The notes paid out in Illinois and Wisconsin went home to be converted into New York and Boston funds too rapidly. So the city bankers went to the State of Georgia and started a lot of subordinate banks there, with whose notes they flooded the Northwest from Chicago as a radiating point. None of these currency mills actually failed, but the rate of exchange on New York was measured by the cost of sending the notes to their several Georgia houses for redemption, which cost was at that time considerable.

The Western free banks for the most part went down in the crash of 1857, and again in that of 1861, and their securities being pressed on the market simultaneously sank to low figures, the notes falling even lower than the securities. Whatever may have been the design of the law-makers (and there is no reason for doubting that it was good), it turned out to be a mere scheme to enable speculators to sell bonds to the public, and continue to draw the interest themselves. It was possible under these laws for a man to borrow, say, $100,000 of State bonds, deposit them with the auditor, receive from him circulating notes, buy wheat with these notes, send the wheat to New York, and sell it for money with which to buy more bonds to deposit with the auditor; and so round and round. This was actually done in some cases, and it was considered an effective way of procuring an adequate supply of money.

What would have happened if this supply had not existed? Why, of course, the wheat would have reached its market all the same, and would have been sold for good money, and this money would have gone to the wheat-producer, instead of the wild-cat and red-dog notes that the State auditor put his name and seal on, that were so handsome to look at, and that we were all so proud of in the beginning. I remember how independent we all felt when we had some of these triumphs of art in our pocket-books.

A process of essentially the same kind for furnishing a supply of money has been going on in this country during the past fourteen years. The Government has been issuing circulating notes of one kind and another on the basis of silver, and although some $400,000,000 of these notes have been put in circulation, money is not a whit more plentiful than it was before. What would have happened if not a single silver note had been issued, or a single ounce of silver bought? Why, the products of the country would have been sold all the same, and in the absence of silver and silver notes we should have had gold and gold notes. But, says some one, there is not gold enough in the world. How do you know that? You, or the likes of you, said the same thing before we resumed specie payments. You said the same thing before Italy resumed. And now Austria-Hungary is preparing to resume, and largely with gold drawn from us. Simultaneously we hear (and I

believe it is true) that Russia has stored away $500,000,000 of gold. I have not the smallest doubt that Austria-Hungary will get all the gold she needs for this pur

pose, and that there will still be some left. I know, too, that the ability of this country to draw gold from the world's stock exceeds that of Austria-Hungary and Russia combined, and that if we wanted more gold we could get it. The first step would be to repeal the present Silver Law. I doubt if anything else would be needed. Mr. Buckle, in his "History of Civilization," showed that the world's progress in the last hundred years had consisted chiefly in repealing bad laws. There is abundance of room left for that kind of progress in our own country.

THE "BANKING PRINCIPLE."

The State Bank of Indiana, the Louisiana and the Massachusetts banks were based upon what is known to economists as the "banking principle," the opposite, or counterpart, of which is called the "currency principle." The banking principle affirms that all trade is barter, that men would swap their goods and services directly, and without the use of money, if they could, but that since they cannot (owing to the complexity of human affairs), any machine which will do this swapping is a saving and a gain to mankind.

This is what a clearinghouse does on a large scale, and a bank on a smaller one. A, B and C and the rest of the alphabet deposit the money they get for their various industries and services in a bank, and then draw their checks for what they want to buy. This is the same as though they deposited their various goods in the bank and gave to each other orders for goods, payable in kind at the bank. There would be practical difficulties in making the division at the bank and in handling the goods, but the essential nature of the operation is not changed by bringing in another set of hands (namely, merchants) to transfer the goods and make the divisions. The fact is, that all trade is at bottom barter and swapping. Now the issue and circulation of bank notes is only an extension of the bankcheck system. It carries swapping by machinery one step further. The checks of an individual often circulate through three or four hands before they reach the bank for payment. The bank note is the cashier's check on the bank. These cashiers' checks circulate more widely than private checks, because the bank's credit is more widely known, and because they are of convenient form and size. They enable the community to make small exchanges, to do small swapping without the use of real money. Since real money is capital, they economize the use of capital.

THE "CURRENCY PRINCIPLE."

The currency principle proceeds upon a theory somewhat different. It assumes that a certain amount of paper notes will be wanted by the public at all times, will always be passing from hand to hand, and will never be presented for redemption. This assumption is based upon experience, and is much the same as assuring that a certain number of hats or pairs of trousers will always be wanted. This amount the Government itself will furnish. In England the bank issues this amount of notes, but it accounts to the Government for the profit over and above expenses, and a fair compensation for its own trouble. When the Bank Act was passed, the fiduciary issues of notes was fixed at £14,000,000. Upon this the bank was to make an annual payment of £120,000, besides paying all the expenses of the note issue and managing the public debt. It was provided also that on the discontinuance of the circulation of certain country banks then in existence the Bank of England should have the right to issue a corresponding amount of notes, paying a tax to the Government thereon, at the rate of two per cent. The net amount received by the Government from the bank last year was £162,716. The fiduciary issue is based on Government securities. If the community wants any more notes than the fiduciary issue (which is now about £15,500,000), it can have them by paying gold for them. But obviously this is the same as using the gold, since a note issued against five sovereigns is merely like a

per annum.

gold certificate of deposit issued by our Treasury. True, there is no external mark to distinguish this Bank of England note from any one of the £15,500,000 issued against securities, but it is a very different thing in fact. The Bank of England is a perfect representative of the currency principle, and the Bank of France is a perfect representative of the banking principle.

THE TRUE PRINCIPLE.

The banking principle is the true one in theory. It is a labor-saving and capital-saving machine at the same time. It does for the lesser transactions of commerce what the bill of exchange and the clearing-house do for the greater ones, and in the same way substantially. It enables trade to be carried on to any extent within the limits of a single nation by a series of offsets. It is barter reduced to science. If there were no disturbing elements, it would gradually root out and supersede every other kind of apparatus for performing the exchanges of mankind. It would do this in the same way and for the same reason that a superior tool crowds out and supersedes an inferior one-as the friction match, for example, superseded the flint and tinder box. But there are disturbing elements. Bad and dishonest management of banks may be minimized, but cannot be prevented altogether. The currency principle has its raison d'être. It says that the first requisite of any bank-note system is the security of the noteholder, and that everything else should be subordinated to that. I agree to that proposition. Any system which does not make the noteholder secure is condemned at the start. But we have seen that the issue of notes against deposited securities did not save the noteholders from loss before the war, while careful and intelligent systems of banking like those of Louisiana, Massachusetts and the State banks of Indiana and Ohio did protect them fully. I consider note issuing against deposited securities erroneous in principle, because it uses up the bank's capital in procuring its notes, whereas, it ought to have this capital free at the outset for the discount of commercial paper.

Take an illustration. Suppose that a bank starts with $100,000 of capital. Under the plan of deposited securities it must pay all this, and perhaps more, in order to get $90,000 of notes to apply to the discount of commercial paper. The bank cannot know whether the parties whose paper is discounted will draw the money in the form of notes or will ask for drafts on some other city or will draw checks which will turn up at the clearing-house the next day. If the parties draw out the notes, these may come back as deposits the next day.

The notes are assets while the bank holds them, but they are liabilities when the public holds them. Each dollar has cost the bank $1.10 and the notes will perform no function that the notes of the old State Bank of Indiana would not perform. Now, suppose that the noteholder could be made safe without the deposited security. Then the bank would have $100,000 of free capital to start with, plus as many notes as the community would draw out and make use of. This amount of notes is all that it can put out, even when it buys them from the Government at $1.10 each. Therefore, the $100,000 of free capital is clear gain to the banking business. But, you say, the bank has the interest on the deposited bonds. Yes, that is what it gets out of a permanent investment, but banks are, or ought to be, organized for discounting short-time commercial paper, and not for long-time loans. If long-time loans are wanted in the banking business, which I respectfully deny, more money can be made by lending on mortgage than by lending to governments.

BANKING ON SECURITIES DOOMED.

I have said that I think that the system of note-issuing on deposited securities is destined to perish. Not only is it erroneous in that it absorbs the bank's capital before its doors are opened for business, but the only securities fit to be used for

this purpose are rapidly disappearing and will soon be gone. The note-issuing feature of the national bank system is moribund already. But the banking feature will not die, even if note-issuing comes to an end. It is so interwoven with the commerce of the country that it will stand, and necessarily stand, for an indefinitely long period with or without note issues. The note circulation of the national banks reached its maximum of three hundred and thirty-six millions in December, 1872. At that time the number of banks was 1940 and their capital four hundred and eighty-two millions. In September, 1891, the circulation had fallen to one hundred and thirty-one millions, while the number of banks had risen to 3677 and the capital to six hundred and seventy-seven millions. This proves that the system is beneficial and is approved by business interests, altogether apart from the note-issuing feature. The reason why is not far to seek. The public have more confidence in the machinery of governmental oversight and enforcement of law, under the national system, than they have under State systems, and this they will continue to have even though some State systems are as good or better. They know that the national system is uniform. It operates in the same way in Washington City aud Washington State and everywhere between. When you know this law and the decision of the courts under it, you know all that is necessary. If you undertake to learn and keep track of the banking laws and decisions of forty-four States and Terrritories, you will find your task a heavy one. There is now a movement on foot to secure uniformity of law in the States, touching the marriage relation, wills, conveyances of land and some other things. As we actually have uniformity of law on the subject of banking, we had best keep it.

HOW TO PRESERVE THE NATIONAL SYSTEM.

Although note-issuing is not a necessary part of the business of banking, it is a vastly desirable part. As has been shown, it is a device for saving both labor and capital in effecting exchanges among men. Hence we may assume that it will sooner or later supplant the present costly method of supplying a currency by means of silver bullion. I think that the national bank note can be preserved and even improved, withont bond security, by a slight change in the present law, viz.:

Out of the present tax on bank notes constitute a safety fund to be lodged in the treasury, the amount of it to be computed by actuaries, taking the national bank mortality of the past twenty-five years as a basis. After this sum is reached, let the tax go into the treasury of the United States, as it does now, as a part of the national revenue. Let the Government continue, as now, to be responsible fc the notes, and let it retain, as now, a first lien on the assets of failed banks and on the liability of the shareholders.

I am assuming, of course, that all the provisions of the existing law except bond security are retained and enforced, so that the ratio of bank mortality shall not increase. The report of the comptroller of the currency for 1891 shows that there have been 164 national bank failures since the system first went into operation. The total amount of circulating notes of these banks outstanding at the time of the failure was $16,209,160. It would take no very long time to collect this whole sum out of the tax on national bank notes, but of course, only a small part of this would be wanted at any one time. This sixteen millions of failed bank notes was all that the whirligig of time brought in from April 14, 1865, to October 14, 1891, twenty-six and a half years. Probably a safety fund, beginning with $5,000,000, and replenished from time to time out of the proceeds of the tax, would be ample. But suppose it were not. We would still have a first lien on the assets. The assets of these 164 failed banks realized $44,606,561, or nearly three times the amount of their circulating notes. I think it would be entirely safe for the Government to continue its responsibility for the notes on these conditions. We must bear in mind that almost all the banks are sound, and honestly managed

the proportion of bad ones to good ones being as 164 to 3,677, or less than five per cent.*

Would the privilege of note-issuing without bond security tend to an increase of bank failures? Would rascals take advantage of the new facilities for noteissuing in order to swindle the public? This is an important question. We have been so accustomed to bond security for bank notes that we have lost sight of some other requirements of the law, of equal or greater importance. One of these is that every bank must have a paid-up capital, and that every shareholder shall be liable for as much more as he has paid in. Moreover, if any bank's capital is impaired at any time, it must be made good. The bona-fide existence of the original capital and the restoration of it, if impaired, are secured by examinations by public officers. Moreover, no bank can issue notes in excess of ninety per cent. of its paid-in capital. Moreover, every bank must have a sum equal to five per cent. of its outstanding notes on deposit at Washington for current redemption purposes. All these provisions are in the way of protection to the note-holder, and they are solid provisions too.

We can now answer the question whether the suggested change in the national banking act will serve as an incentive to deliberate swindling, and thus increase the amount of bank mortality over and above the experience of the past twenty-six years, which we have seen is less than five per cent. I think that five per cent. of failed bank notes can always be provided for out of the proposed safety fund, without trenching upon the assets of the bank or the added liability of the shareholders, although I would retain the first lien on the same which the Government now holds for this purpose. I do not believe that people are deliberately going to risk 100 per cent. of their own capital in order to have the chance of cheating to the extent of ninety per cent. of it, and running the risk of the State prison besides. This answers the question whether the suggested change in the law will serve as an incentive to deliberate swindling, or not. I think that the law will be enforced

Since the foregoing was written, more precise data have been supplied in a speech made by the Hon. A. B. Hepburn, ex-comptroller of the currency, from figures supplied by Mr. Eckels, the present comptroller, as follows:

"Now let us examine our own experience since the creation of the National banking system. I am indebted to Comptroller Eckels for the following figures:

Average annual circulation of National banks, 1864 to 1894...
Outstanding circulation of failed National banks...

Cost of the general government on account of National banks as shown by the books of this office..

Additional estimated cost...........

$282,801,252 17,819,541

.$7,610,169
7,732,914

15,343,082

21,917,093

17,533,674

'These figures verify your conclusions to the effect that a tax on outstanding circulation of one-fifth of one per cent. would have repaid the cost of the National banks to the general government, and also that a tax of one-fourth of one per cent. would have redeemed the notes of all failed National banks,-in fact, a tax of two-fifths of one per cent, would have been ample to meet both the cost of that system and the redemption of the notes of failed National banks." (Signed) JAMES H. ECKELS, Comptroller.

"If an annual tax of two-fifths of one per cent. would suffice to defray all expense and redeem every note of every failed bank for the past thirty-one years, a five per cent, guarantee fund is certainly ample to protect the government against loss in guaranteeing the redemption of notes under the proposed law. But as further evidence let me read the following letter from Comptroller Eckels: 'SEPTEMBER 27th, 1894.

In further answer to your letter of September 13, you are respectfully advised that the loss to the general government on account of circulation of failed National banks, up to January 1st, 1894, had there been no bond deposit, would have been $1,119.253. Of this amount $958,247 represents the loss by banks whose trusts are still open and may pay further dividends, thus reducing the amount last named. The tables showing the full amount of dividends paid by all failed National banks are not yet completed, but an examination of the accounts of each trust develops the fact that there would have been no loss on circulation other than above indicated. This statement applies to all failures down to January 1, 1894. (Signed) JAMES H. ECKELS, Comptroller.'

"Under present laws the government is bound to redeem all notes of all failed banks, and is given a prior lien upon the assets of the failed banks to reimburse such payment. With this law in force and without bonds to secure circulation, the government would, during this thirty-one years, have lost not exceeding $1,139.253. An annual tax of three-hundredths of one per cent., upon circulation, would have covered this loss. Surely, a five per cent. guarantee fund will make the notes proposed in this plan perfectly secure."