Again; note the dangers of constituting government legal-tender notes the money of banking. Our banks have been accustomed to hold about one-half of their cash. reserves in this form of currency; nor could they have avoided so doing if they would; for the available supply of gold coin has not been sufficient for their whole reserve requirements. And yet what is to-day the basis of this form of money? The Government reserve has fallen to half its legal volume-and this at a time when the distrust against silver is causing an accumulation of gold by all the European national banks, the United States being thereby directly exposed to an exhaustive drain upon their stock of gold. Under these exigencies, the notes are used as a means of getting gold out of the Treasury for export, and for paying customs duties in lieu of gold. The Government reserve thus diminishes at both ends-from an increase of withdrawals and a loss of specie income, both movements tending to discredit the notes, and compelling large loans to replenish the reserve, but without stopping the drain. Can it be considered a legitimate factor in our banking system that the bauks should be compelled to hold a large portion of their reserves in a form of currency subject to these dangerous vicissitudes and to being used for purposes hostile to the public credit? The vitiation that the Legal Tender Act has introduced into our currency system inevitably extends itself into our banking system, and the credit of the nation and the fabric of commerce and finance are together sapped at their foundations. The crisis from which we are just escaping has lifted the veil that has so long screened the unsuspected dangers lurking in that act; and at last the country has become impatient for the expurgation of this vicious element from our currency system.

HOW SHALL THE LEGAL TENDERS BE RETIRED?

The question next arises, by what means shall the retirement of the Legal Tenders be effected?

1. The law enacted for this purpose should prohibit, from the date of its operation, all reissues of the notes, and provide for their cancellation as they are redeemed. Two requirements attendandant upon such cancellations would have to be anticipated. The Treasury would need to be furnished with the means for the redemption of its notes; and the contraction of the currency would have to be prevented by the simultaneous issue of some other form of money to an extent about equal to the retirement of the greenbacks.

2. For the first of these purposes and, to a certain extent, for the second also, the treasury gold reserve, be it the legal $100,000,000 or less, would be available. After that resource would come the $50,000,000 a year, or thereabouts, required by law for the Debt Sinking Fund, which could be as lawfully applied to this purpose as it is to the liquidation of the funded obligations. Should the current surplus revenues be insufficient for this requirement, the deficiency could be made up from a tax to be devoted to this specific object. Another resource for the liquidation would arise from the silver bullion held against the Sherman notes, which, sold at the present market price, would probably realize about $96,000,000. It may be assumed that a certain amount of the greenbacks would be found to have been lost or destroyed during the thirty years of their use, so far reducing the amount to be redeemed. Estimating that item at say $20,000,000, the sum of both kinds of legal tenders to be liquidated would be $480,000,000. In order to accumulate these amounts, from the sources mentioned, the receipts from revenue, being gradual, the process of retirement would have to be extended possibly over six years. Considering the delicacy of the operation, the importance of avoiding large and sudden dislocations of money, and the uncertainty about the replacing of the retired notes being effected, pari pussu, by new bank issues, prudent financiers would, perhaps, think that a period by no means too long for insuring a smooth working out of the process.

3. Should objection arise against any of the foregoing means of payment, the only remaining alternative would be to issue short-date low-rate bonds to such amount as

might be required, the bonds to be liquidated from surplus income at the convenience of the Treasury. It is doubtful, however, whether public opinion would prefer such an alternative to that of paying the notes directly from current income and from assets already in the Treasury. Resort to borrowing, however, might facilitate the completion of the transition in a considerably shorter period than would be possible under the other plan, should expedition be deemed, on the whole, desirable.

Carefully considered arrangements would need to be devised for keeping an even pace between the retirement of the legal tenders and the outputting of the currency authorized to fill their place. What the substitute currency should be is the next question for consideration.

THE NATIONAL BANKS AS A FACTOR IN CIRCULATION.

THE FAILURE OF THEIR GUARANTY SYSTEM.

The National Bank Act requires that banks issuing circulation thereunder shall deposit United States bonds with the Treasury as a guaranty against the notes; in consideration of which the Government becomes responsible for their final liquidation, the ratio of the guaranty being $100 of bonds to $90 of issues.

This method of protecting the notes was first introduced principally for the purpose of creating a market for a large amount of Government bonds under the exigencies of war, and not because it was the only or the best available means for affording a perfect guaranty. Of course, the security has proved superfluously ample; broader indeed than that of any other bank notes in the world, not excepting those of the Bank of England. But it is possible that a guaranty may be made needlessly broad and exacting and that it may prove positively and gratuitously harmful to the debtor. And such is the fact in respect to the security provided in this particular case. It not only requires a deposit exceeding in market value that of the notes issued by 25 to 35 per cent., but, by putting such a large amount of its capital beyond control, it tends to deprive the bank of that freedom in handling its resources which is essential to making the most of its facilities, to meeting emergencies, and to efficient management generally. The effect of this excessive guaranty is expressed,—and yet but partially,--in the fact that, in spite of the constantly increasing needs for circulation, the note issues of the National Banks declined from 360 millions in 1882 to 180 millions in 1890; or, to put the declension in a more significant form, we cite from the Treasury Report of 1890 (p. 35) the fact that, in 1886 the percentage of circulation to capital. surplus and undivided profits was about 45 per cent., and is now (1890) less than 13 per cent." Other injurious effects have appeared in the transfer of many banks from National to State charters, and in a much lower ratio of growth among the national institutions than has occurred among banks operated under State laws. It is thus manifest that the present system of bond deposit is destructive not only to note issues, but also to that free use of resources which banks must have if they are to be allowed to live and to confer the largest possible benefits upon the community.

The Bank of England affords about the sole precedent for this form and rate of guaranty. That institution, however, needed to be guarded by entirely exceptional precautions, for the reason that it is a National bank, on which the fluctuating fortunes of the Government and the finances of the immense colonial and foreign interests of the Empire, as well as the large banking interests of London, were intended to be immediately dependent; the ordinary issuing banks, be it noted, being free from any legal stipulations for the protection of their notes. Of course, no mere note-holder would, as such, object to the notes of our banks being guaranteed in excess of their value; and it is undoubtedly their excessive guaranty that has made them popular and given them unchallenged currency from Maine to California. But there is such a thing as a guaranty exceeding immensely all legitimate necessity, which is a bad principle of contract. There is such a thing as a guaranty exceeding what a guarantor

can afford; which, when compelled by legal power, is a public wrong. There is such a thing as imposing a rate and kind of note guaranty which prohibits issues and deprives the people of the circulation they need and to which they have a right; and that process of strangulation is exactly what the existing law is now mercilessly enforcing. Economy in guaranty, not exorbitance, is the legitimate principle. An excess of guaranty also carries the unwholesome consequence of lessening the inducements for enforcing redemption, thereby impairing that elasticity in the circulation which is necessary in order to keep its volume always adjusted to the evervarying requirements of business. These faults have become so generally appreciated alike with the public and the banks, that the necessity of a new form of protection is now well nigh universally conceded.

AN AMENDED GUARANTY.

A true, natural and sufficient guaranty would be provided by a law permitting any bank with a capital of not less than $25,000, to issue circulating notes, to the maximum extent of 75 per cent. of the bank's paid-up capital, on the stipulations following: (1) That the notes shall be a first lien upon the whole assets of the bank and a claim upon the stockholders to the amount of their stock; (2) That redemption agencies should be established of a nature that would certainly insure effective check upon over-issues; (and 3) That the enforcement of these regulations should rest with the Federal authority. More on this later.

THE LIMITS OF ISSUE.

For the purpose of preventing issues of notes out of due proportion to the resources of the bank, it is important to impose a maximum limit at which emissions must stop. That limit may, perhaps, be best defined by fixing it at a uniform percentage of the capital. The considerations determining what would be a proper limit relate principally to keeping the demand obligations of the bank within safe limits, and to the public requirements for circulation. The maximum of issue, it would seem, might be safely fixed at 75 per cent. of the capital. At first sight that may appear a high ratio, and, compared with some antecedents, it is so. For the ten years next preceding the war, the circulation of the State banks averaged 53 per cent. of their capital. And in the year 1873, when the circulation of the National banks reached its highest point, the amount of notes outstanding was, on the average, equal to 70 per cent. of the capital. But, in estimating the former of these precedents, it is to be considered that the ability and morale of bank management in those times ranked so far below that which now exists that the ante-war experience affords a very imperfect criterion as to the measure of discretion that might be safely conceded now, when our banking is conducted with a moderation and conservatism surpassed perhaps nowhere in the world. The precedent cited from the experience of the National banks is almost identical with the ratio above suggested. Due importance, however, should be attached to the fact that the surplus of the banks is in the nature of capital, and should therefore be taken into account in determining this factor. In October, 1894, the capital of the National banks was $668,800,000 and their surplus $245,200,000, making a total of $914,000,000 of virtual capital. It is not easy to see how it could be deemed an undue license to permit issues up to 75 per cent. of the formal capital when it is backed by such a large amount of surplus capital.

To the practical legislator, who has to respect the popular clamor for “plenty of money," it may seem important to know what amount of currency the National banks could issue under this proposed limit. With a capital of $675,000,000, the present amount, assuming each bank to issue to its maximum allowance, the combined banks would have an issue power equal to $506,000,000. Deducting from that the $200,000,000 of old notes already outstanding, they could issue, under the suggested new authorization $306,000,000. It is not supposable, however, that they would issue to

an extent at all approximate to the legal maximum; nor would it be desirable that they should do so. Under normal conditions, banks never work up to their legal limitations, but prudently maintain a considerable margin for elasticity. It would be a liberal estimate t› suppose that, on the average, the issues would not exceed 60 per cent. of the capital. This would mean an issue, as against the now existing capital, of $405,000,000. Deducting from this the now outstanding $200,000,000, there would be a remainder of $205,000,000 available for offsetting the contraction arising from the cancellation of the $500,000,000 of legal tenders. It might be expected, however, that the new conditions of issue would cause some increase in the amount of bank capital, which would broaden the capacity for issuing notes. What that increase might possibly be, may be inferred from the fact that, for the eleven years, 1880-1891, the annual growth of the capital of this class of banks averaged $20,500,000; which would permit of a yearly addition of $12,000,000 to $15,000,000 in the volume of these notes. It may, however, be considered reasonably probable that under the suggested changes in the National system, the capital would increase in a higher ratio than it bas during the last decade. It is not, however, at all presumable that the National banks could alone supply the whole amount of notes required to offset the retirement of the legal tenders. Another important source of issue must be provided, to which reference will be made later.

IS THE PROPOSED GUARANTY SUFFICIENT ?

On this question the writer takes the liberty of quoting the following from his testimony given before the House Committee on Banking and Currency in December, 1894:

"There can be no possible question about the sufficiency of such a guaranty. The doubt would rather be whether it would not be really excessive. Assuming the improbability that the failed bank had outstanding an amount of notes equal to the suggested maximum, namely, 75 per cent. of capital, even then the guaranty afforded by the shareholder alone would exceed by one-third the amount payable to the note holders, and the assets of the bank would be so much further surplus over the note liabilities.

"With the combined guaranty from assets and stockholders, the protection would be more ample than that afforded by the existing deposit of bonds; the only difference being the minor one that, under the new method, the notes might not be redeemed with quite the same promptness as they are under the now existing arrangements. Considering, however, that there could be no question about the ultimate full payment of the notes, there would be no reason why they should not continue to circulate until the holders were notified by the Receiver to present them for redemption.

"This amplitude of guaranty is suggested, not because there would be any commensurate risk attending the notes, but because the public are excessively sensitive about the safety of the bank currency, and it is necessary to guard against all pczsibility of such distrust by providing a protection which makes depreciation of the notes conspicuously impossible. The guarantors need not object to the excess of guaranty, for it does not affect the amount of their actual liability, which really is, on the whole, a relatively small affair. During the unprecedented bank panic of 1893, the failures of national banks represented only four-tenths of one per cent. of the entire capital of those institutions.

"The experience of the national banks affords data from which the risks on bank circulation may be fairly estimated. For the last thirty years, covering two great panics and two minor ones, the total amount of the capital of banks which went into the hands of receivers averaged $1,464,000 per year. The average amount of the capital of all the national banks during that period was about $400,000,000. The proportion of the capital on which failures occurred to the total capital of all the banks was therefore a little over one-third of 1 per cent. There is no apparent reason why this ratio

should not be maintained in the future. Upon the present $1,000,000,000 of National and State capital (assuming that the latter were allowed to issue), the yearly failures might, according to this rule of experience, be expected to cover about $3,600,000 of capital.

"Assuming that the banks were permitted to issue notes to the extent of 75 per cent. of their capital, but kept out only 60 per cent.-which I take to be a reasonable estimate we should then have an annual crop of about $2,160,000 of insolvent notes, which would be equivalent to a fraction over onc-fifth of one per-cent of the whole banking capital. Against this would stand a total of $4,240,000,000 of bank assets and a stockholders' pledge of $1,000,000,000, in all $5,240,000,000, upon which the note holders would have a first lien. It therefore hardly seems necessary that either stockhol ers, depositors or note holders should feel any serious concern about the risks attending note issues, or the nature or sufficiency of this proposed guaranty. If stockholders or depositors should desire to protect themselves against the guaranty given to the no1e holders, it would probably be found that the risk could be insured from year to year for a surprisingly nominal consideration."

It is doubtful if, in the whole range of financial operations, many other instances could be cited of such a diminutive ratio of hazard. The reports of the Comptroller of the Currency show that, under the national bank failures of the thirty years from 1864 to 1893, the amount collected from general assets was $60,477,000, and from shareholders $8,388,000; from which it is inferable that, as a rule, the stockholders have had to furnish only 12 per cent. of the amount contributed toward liquidation, the remaining 88 per cent. being derived from assets. These facts justify the conclusion that while the stockholders' guaranty would more than cover the note liabilities, yet, as a rule, it would be rarely necessary to call upon them; inasmuch as, from data of experience, it is reasonable to expect that the notes would not be found to exceed onefourth of the total liabilities of the bank. Under these circumstances, it appears safe to conclude that the suggested guaranty from assets and shareholders combined would be found in practice to afford a larger ratio of protection than the deposit of United States bonds under the National system, or the gold and consols guaranty of the Bank of England.

THE STATE BANKS A NECESSARY FACTOR.

THEIR PRESENT STATUS.

Public attention is awakening to the question whether the banks operating under State charters are equitably treated as to their right to issue notes.

Previous to the war that right had been unquestioningly conceded. Pending the war it was held in abeyance, under what were deemed expediencies of war finance. Congress thought it expedient to win, as far as possible, the support of the banks for sustaining the resources and credit of the Federal Government. For that purpose the National Banking System was created; and in order to bring into the new system the largest possible number of the State banks, a tax of 10 per cent. was put upon their circulation, while the tax upon the circulation of the new class of institutions was fixed at 1 per cent. Both taxes still remain in force, their effect being to entirely prevent issues by the State banks and to restrict them by the National institutions.

Whether this extreme discrimination was justified by the military necessities of the times may be conceded to be an open question; but that its perpetration for thirty years amounts to a grave political injustice will admit of little doubt among unbiased judges. It is the consciousness of a virtual wrong in the relations of this class of banks to the law that is now raising this question for an equitable adjustment. It is contrary to the equitable principles of American government, if not to the written Constitution upon which it rests, that our banking institutions should be invidiously divided into one set to which the valuable right of issuing notes is conceded, and another from which that privilege is indirectly, but not the less completely, withheld. It