as well and as thoroughly in the future as it has been in the past, probably more so, since each bank failure teaches the comptroller's office some lesson. We ought not to stand shivering over the approaching wreck of the national bank-note system. Those who think that it ought to be preserved should be willing to try some experiments. This world is not made up principally of cheats and rascais. The preponderance of honest and capable men in the banking business, as we can prove, is more than ninety-five per cent. But if worst comes to worst-if bank mortality should increase under the proposed change-Congress is always at hard to make needed amendments to the law. Wisdom will not die with us.

THE SAFETY-FUND PRINCIPLE.

The safety-fund principle is no new one in our history. It was adopted in New York as long ago as 1829. Each bank was required by law to pay to the State Treasurer one-half per cent. on its stock until three per cent. is accumulated. By some mistake or accident in framing the law, the safety-fund was made applicable to the payment of all the debts of failed banks instead of the circulating notes only. The preliminary discussion shows that the intention was to protect the noteholders only. The contributions to the fund began in 1831. In 1835 the number of safety-fund banks was seventy-six, with a circulation of $14,000,000. The amount in the safety fund was $100,000. During the first twelve years of its operation no safety-fund bank failed, and the fund was not drawn upon, for although the panic of 1837 had supervened, the suspension of specie payments was legalized for one year, at the end of which time all the banks resumed. In 1841 six safety fund banks failed, there being ninety contributing banks at that time and $841,000in the fund. Then the mistake of making the fund applicable to all the liabilities of the failed banks, instead of confining it to circulating notes, was discovered. Litigation and injunctions, delay and consequent depreciation of notes followed, which we have not time to recapitulate. They have been carefully compiled by the late John Jay Knox.* The upshot is that if the safety-fund had been applicable only to the circulating notes, it would have redeemed every failed bank note during the twenty-five years that the system lasted. Millard Fillmore, who was comptroller of the State in 1848, gives, in his report of that year, the exact figures up to that time. He shows that the contributions to the safety-fund had been $1,876,063 and the notes of the failed banks $1,548,558, leaving a surplus of $327,505 as against circulation. This is perhaps the most pregnant fact in the history of banking in this country. The safety-fund system and the bond-security system ran side by side with each other in New York for nearly a quarter of a century, with comparative results decidedly in favor of the former. Comptroller Flagg, in his report for the year 1846, says: "In the security of the public under each system, our experience in the failure of ten safety-fund banks, and about three times as many of free banks, proves that the contributions of one-half of one per cent. annually on the capital of the safety-fund banks have thus far afforded as much protection as the deposit with the comptroller by the free banks of a sum nominally equal to all the bills issued by them. It will be seen by reference to a statement under the head of insolvent free banks, that the loss to billholders, on the supposition that all the securities had been stocks of this State, and bonds and mortgages, would have been over sixteen per cent., while the actual loss has been nearly thirty-nine per cent." The constitution of New York, adopted in 1846, makes noteholders preferred creditors of all failed banks. It may be remarked here that this preference of the claims of noteholders upon the assets of failed banks has become an axiom in banking law and science, and is no longer called in question.

The late Mr. Knox, whose authority is far greater than mine on any banking * See Rhodes' Journal of Banking, April, 1892.

question, argued in his report as comptroller of the currency for 1882, against the safety-fund plan and all other plans for keeping the national bank note system alive without bond security. I mention this lest I may seem to have overlooked it. Mr. Knox changed his mind on this subject completely a few years before his death, as he told me and others.

It is proper, nevertheless, to notice one of the arguments in his 1882 report, viz.: That although the assets of failed banks when taken together are ample to reimburse the Government for the redemption of failed bank notes, yet some bank failures are worse than others, and some of them would leave hardly anything in the way of assets. Of course, we could not make good the deficit of one bank with the excess of others. The State of New York once had a similar difficulty to deal with. When she discovered that the blundering legislation of 1829 had left a shortage in the safety-fund, she made it good by an issue of her own bonds and reimbursed herself out of the safety-fund when subsequently replenished. The National Government could do the same, and having the taxing power always in hand would not need to wait long for reimbursement. For Mr. Knox's later views, see an officially published "Interview between the Committee on Banking and Currency of the House of Representatives and John Jay Knox, on the 16th day of January, 1890," page 14.

The comptroller of the currency in his last report recommends an extension of the present bonded debt of the United States for twenty, thirty and forty years beyond its present term at two per cent. interest for the purpose of continuing the national bank notes. There are serious objections to this plan from political and economical points of view, but an equally serious one from the banking point of view is that it is inadequate. If carried out, it would leave the banks just where they are now. There is no profit in banking on a two per cent. bond. The present marasmus would be continued indefinitely. We hope for something better. We ought to strive for a system that will be really elastic and responsive to the wants of trade. The present system is as stiff as a ram's horn and almost as crooked. One popular argument brought against the national banking system is that in order to get $90 of circulation we must first withdraw $100 from the community. This is a valid criticism as regards the localities not provided, or inadequately provided, with banks.

An objection may be raised in reference to the source of the proposed safety fund. This source is the present tax on national bank notes. It may be said, on the one hand, that this is a part of the national revenue and that it cannot be spared, and on the other hand, that if it can be spared it ought to be repealed. In answer to the latter objection I venture to say that this tax never will be repealed until some way is found to carry on government without revenue. Moreover it ought not to be repealed. As regards the Government's need of this particular item of revenue: The tax for the fiscal year 1891 amounted to $1,216,104—a very small amount in the sum total of Government receipts, but I agree that at the present time the treasury needs to look after its sixpences. This tax is one per cent. per annum on circulation. If the requirement of low interest bond security were relaxed, the tax might be doubled without harm or injustice. We have seen that the Government of England exacts two per cent. interest or tax from the bank on all fiduciary note issues over and above the original £14,000,000. But if such a tax should be really oppressive under the new conditions, the excess would be remitted as soon as the safety fund had reached the required limit.

I should consider it indispensable that the Government should continue to be, as it is now, responsible for the note issues. I think that any government, National or State, should be responsible for everything that it allows to circulate as money. A right step in this regard was taken in the Silver-Purchase Act of July 14, 1890, which makes the Government responsible for the redemption of the silver notes in gold. True, this act is only declaratory of the policy of the United

States, but it is mandatory upon any honest secretary of the treasury, and I venture to say will never be departed from.

BANK-NOTE INFLATION.

The question may be asked, what is to be the limit to national bank notes issued in this way? At present the limit is fixed by the deposited securities. What guarantee shall we have against currency inflation, if currency can be had on such cheap terms? The answer is that the law now limits the circulation of banks to ninety per cent. of the paid in capital of the smaller ones, and to eighty, seventy-five and sixty per cent. of the larger ones. We do not propose to alter that, although we have seen that the State Bank of Indiana was allowed to issue notes to the amount of double its capital, and the banks of Louisiana could issue without any limit at all, and that these institutions were almost the only ones in the country that did not suspend in the panic of 1857. There is hardly time to go into an argument to show that there can be no such thing, under modern conditions, as bank-note inflation on a gold basis. I might quote many authorities on this point, but I will refer you to the latest treatise on banking, and one of the best I am acquainted with--that of Professor Dunbar. This author shows in simple language, and with illustrations that anybody can understand, that a bank is powerless either to put out notes or to keep them out. That power resides exclusively in the hands of those who hold checks on the bank and have the right to draw money from it. What is called bank-note inflation is a consequence and not a cause of general inflation. You all remember, doubtless, the commercial crisis of 1873, and if you do, you remember that the requirement of bond security for bank notes did not prevent it from being one of the most disastrous panics in our history.

CONCLUSION.

If the plan here sketched, or something like it, should be adopted, there would be no need of State bank notes, since every facility that a State could grant for the issue of a sound and safe currency would be granted by the National Government. I take it that nobody is in favor of an unsound or unsafe currency. I feel sure that any political party which fathers an unsound or unsafe currency will be severely dealt with at the polls. I know that there is a deep-seated prejudice against national banks, but that prejudice grows out of a belief that the banks draw interest on the bonds and on the notes at the same time, and thus make a double profit. It cannot exist if there are no bonds there, but if, in place thereof, each bank is required to contribute to a safety fund. Probably such a measure would put an end to silver purchases, since there could no longer be any apprehension or pretence of a shortage of currency. The danger of free coinage of silver has, in my judg ment, passed away, notwithstanding some mutterings on the horizon, leaving nothing but the Purchase Act as a disturbing element.

In conclusion, gentlemen, I remark that you have got to do something. Time is running on. The national-bank system is running out, and nothing is taking its place. Every instructed person knows that governments have no facilities for furnishing money to their people, and ought never to do such a thing, and never can do so without producing mischief. All the financial heresies of the past quarter of a century have had their origin in the Legal Tender Act of 1862. This has been the parent of an unnumbered progeny of wrong ideas. To give a history of all the bad monetary conceits that have been enacted into law, or are waiting to be enacted, or have been killed or temporarily stunned during the past quarter of a century, would take more time than we have at our disposal. The largest part of my work as a journalist during that period has consisted in clubbing financial heresies which have had their root in the Legal Tender Act, and would otherwise never have existed.

SOUND CURRENCY.

PUBLISHED BY THE SOUND CURRENCY COMMITTEE OF THE REFORM CLUB.
Publication Office, No. 52 William St., New York City.

Vol. II., No. 10.

NEW YORK, APRIL 15, 1895.

SUBSCRIPTION.

$1.00

SINGLE COPIES, 5 Cents.

Each number contains a special discussion of some Sound Currency question.

THE LESSON OF EXPERIENCE.

*

BEFORE TAKING.

"The general assembly may incorporate one banking company, and no more, to be in operation at one time. * The capital stock of the bank to be incorporated shall never exceed $5,000.000, at least one-half of which shall be reserved for the use of the State."-CONSTITUTION OF MISSOURI, 1820.

"One State bank may be established, with such number of branches as the general assembly may, from time to time, deem expedient. 2/3 = At least two-fifths of the capital stock shall be reserved for the State."-CONSTITUTION OF ALABAMA, 1819.

"The general assembly may incorporate one State bank, with such amount of capital as may be deemed necessary, and such number of branches as may be required for the public convenience. which shall become the repository of the funds belonging to or under the control of the State; and shall be required to loan them out throughout the State, and in each county in proportion to representation.”—CONSTITUTION OF ARKANSAS, 1836.

"No bank shall be incorporated by the legislature without the reservation of a right to subscribe for, in behalf of the State, at least one fourth part of the capital stock thereof and the appointment of a proportion of the directors equal to the stock subscribed for."-CONSTITUTION OF MISSISSIPPI, 1817.

AFTER TAKING.

"No State bank shall hereafter be created, nor shall the State own or be liable for any stock in any corporation or joint-stock company, or association for banking purposes now created, or hereafter to be created."-CONSTITUTION OF MISSOURI, 1875.

"The State shall not be a stockholder in any bank, nor shall the credit of the State ever be given or loaned to any banking company, or association, or corporation."-CONSTITUTION OF ALABAMA, 1867.

"No bank or banking institution shall be hereafter incorporated or established in this State."-CONSTI TUTIONAL AMENDMENT OF 1846

"Neither the State nor any city, county, town, or other municipality in this State shall ever loan its credit for any purpose whatever."-CONSTITUTION OF ARKANSAS, 1874.

"The credit of the State shall not be pledged or loaned in aid of any person, association, or corpora tion; nor shall the State hereafter become a stockholder in any corporation or association."-CONSTITUTION OF MISSISSIPPI, 1868.

STATES AS BANKERS.*

CLASSES OF INSTITUTIONS COMPRISED.

It is intended in this sketch to describe not the general classes of banks which in recent discussions have ordinarily been termed "State Banks," but only those in which the State was interested either as the principal stockholder, or through having a part in their management, or those which, acting as the fiscal agent of the State, were given so much prestige as to be considered State institutions, when contrasted with other banks less favored.

Doubt

It is evident that no hard and fast line of classification can be drawn. less some of the institutions here included might very properly have been left for description elsewhere; and on the other hand, there are other institutions in which the interest of the State was such that they might not improperly have been included. Interesting as may be the question of State investments in banking corporations, such investments alone, where not sufficient to cause the State interests to dominate the control of the bank, have not been considered as sufficient to warrant mention here.

COLONIAL EXAMPLES.

The few instances here given of the connections of the colonies with the business of banking among their citizens are interesting as being the forerunners of the later State institutions which are hereafter described; and if they seem to partake more of the nature of issues of fiat currency than of banking, it must be remembered, first, that they are in fact merely the few instances of such issues in the various colonies which were placed upon a banking basis; and second, that banking as such had then hardly made an impression upon the business world.

It must not be understood that the instances here cited are intended as a summary of the issues of paper money by the colonies. Several of the others issued paper money at different times, and several of the colonies named below issued currency on other occasions than those cited here. But the operations to which attention is here directed are those which partook of the nature of banking, the notes being loaned out in various ways within the colony-chiefly upon landed security-and not used, as in other cases, to defray the expenses of the colonial governments.

Massachusetts in 1714 issued £50,000 in bills, which were put in the hands of five trustees and loaned out in sums of from £50 to £500, "at five per cent. on safe mortgages on real estate, one-fifth part of the principal payable each year." Though the period of the loans was thus restricted to five years, they seem to have been renewable, and some of them were out over thirty years. The income was to be used to meet public expenses. This loan was authorized for the purpose of frustrat ing "a scheme for establishing a fund or bank of credit upon a land security" at that time projected by individuals in the colony.

An additional loan of £100,000 was ordered in 1716. "This amount was committed to the care of county Trustees; was proportioned to each county according to its tax; secured by mortgaged estates of double the value of the sum borrowed, each loan not exceeding £500 nor under £25, for ten years at five per cent., paid annually. The profits to help pay for the expenses of government, and the bills to be returned at the end of this period and burnt. Frequent litigations subsequently arose in the settlement of the mortgages for this money. A speedy result of this emission was to depreciate the paper currency by raising silver to 12s. the oz.” †

In 1721 a further issue of £50,000 upon practically the same terms was loaned out.

Rhode Island. In 1715 there was emitted what was called the First Bank of £40,000. The bills were issued by the colony and loaned out to inhabitants at 5 per cent. interest, for a period of ten years, on real estate security. In May, 1721, a second bank of £40,000 was issued and loaned out like the first, except that the period of the loan was but five years, which was afterwards extended to thirteen years. Other banks continued to be issued from time to time,

*The writer acknowledges sp cial indebtedness to the following sources, of which free use has been made in the preparation of this pamphlet:

J. J. Knox, History of Banking in the United States, in Rhodes' Journal of Banking, 1892.

R. T. Durrett, Early Banking in Kentucky, in Proceedings of Kentucky Bankers' Association, 1892. Lyman J. Gage, Banks and Banking in Illinois, in World's Congress of Bankers and Financiers, 1893 J. H. Fitts. Sketch of the State Bank of Alabama, in Proceedings of Alabama Bankers' Association, 1891. Geo. B. Reed, Sketch of the Early History of Banking in Vermont, 1879.

Felt: Early Massachusetts Currency, 1839, p. 70.