[ Volume XXV
THE CHICAGO BANKER
28
im
Digest of the New Currency Law
Address delivered by J. A. Latta, of Minneapolis, before the Clover Leaf Bankers Club, at Pine City, Minn.
to the board. The officers of the association may then, on behalf of such bank, apply to the comptroller for an issue of circulating notes to the extent of 75 per cent of the cash value of the securities and commercial paper pledged. The comptroller shall refer the application to the Secretary of the Treasury with his recommendation, and if the Secretary considers the additional circulation desirable in the territory from which the demand comes, and the securities offered are accepted, he will direct the issue of the notes to the association on behalf of the bank to an amount not to exceed 75 per cent of the cash value of the securities.
Conmiercijil_paper is held to include only notes representing actual commercial transactions, which shall bear the names of at least two responsible parties and have not to exceed four months to run, and circulation with such paper as a basis can be issued only tip to 30 per cent of the unimpaired capital and surplus. But, as law is worded: “To render available under the direction and control of the Secretary of the Treasury as a basis for additional circulation any securities including commercial paper held by national banking associations,” the provision as to the percentage of circulation to be based on commercial paper appears to be of no great importance. Municipal securities may be used through the currency association on same basis as when sent direct to the Treasury.
Provision is made that the banks and assets of all banks belonging to the association shall be jointly and severally liable to the United States for the redemption of such additional currency, and a lien is created, as under section 5230 of the Revised Statutes, under which, in case of insolvency, the United States shall have a paramount lien upon all the assets for the benefit of note creditors, said lien to be in preference to any and all claims whatsoever except necessary administration costs and expenses. However, to simplify matters, the United States holds all the banks of the association jointly and severally liable, and they, in turn, will have the benefit of the lien before mentioned and assume the liability in the proportion that the capital and surplus of each bears to the aggregate capital and surplus of all banks in the association.
As now with the United States bond secured currency, a redemption fund of 5 per cent of the circulation shall be maintained by the bank with the United States Treasury.
On all emergency circulation a tax shall be paid at the rate of 5 per cent per annum for the first month, and afterwards an additional tax of 1 per cent per annum for each month until a tax of 10 per cent per annum is reached ; thereafter no further increase is made. No change in taxation is made on the currency secured by government bonds.
Any bank desiring to withdraw any of its emergency circulating notes may do so by the deposit of lawful money or national banknotes with the Treasurer of the United States. No limit as to amount is made; in this respect unlike the national bank notes secured by government bonds, which cannot be retired faster than $9,000,000 per month. The money deposited for withdrawal of circulation shall not be covered into the Treasury, but shall be retained for the purpose of redeeming the notes, thus making an immediate contraction of the currency, whenever such a deposit is made.
ceed 90 per cent of the market value and not to exceed the par value of the collateral.
The law provides that the district or municipality whose securities are used must have been in existence for a period of ten years, and for an equal period previous to such deposit shall not have defaulted in payment of any part of the principal or interest of any funded debt authorized to be contracted by it, and the net funded indebtedness shall not exceed to per cent of the valuation of its taxable property, to be ascertained by the last preceding-valuation for tax assessment. The Treasurer of the United States, with the approval of the Secretary of the Treasury, shall pass upon the character and amount of these securities, and may require additional collateral or substitution.
This form of emergency currency would apparently be readily obtainable and reasonably well secured. Its benefits, however, would be availed of only by banks holding the required class of bonds among their assets, as to borrow such bonds on usual terms would make the transaction so expensive that in all probability the provisions of the act would not be made use of. In brief, this part of the emergency currency law will not appeal with force to the majority of our Western bankers.
The other method of issuing currency is through the organization of national currency associations. Ten or more national banks, each having an unimpaired capital, and surplus of not less than 20 per cent, with an aggregate capital and surplus of at least $5,000,-000, may form a voluntary association called a national currency association. This shall be regularly incorporated through filing a certificate, setting forth the names of the banks, the place of business, and the name of the association, which must be approved by the Secretary of the Treasury. The association may sue and be sued and exercise body corporate powers. Only one such association shall be formed in any city, and the banks so organizing must, as nearly as possible, be located in contiguous territory. After the organization is perfected, any bank qualified for membership shall, on the approval of the Secretary of the Treasury be admitted to membership and shall thereafter be deemed a part of the corporation and entitled to all its rights and privileges, and subject to all of its liabilities. Membership in more than one such association is not permitted. Associations shall be managed by boards, consisting of one representative from each bank, but the by-laws shall be subject to the approval of the Secretary of the Treasury. A president, vice-president, secretary, and treasurer shall be elected, and also an executive committee of not less than five members. Such executive committee may exercise all the powers of the corporation except the making of the by-laws and election of the officers. Any bank belonging to the association which already has outstanding circulating notes based on government bonds to the extent of 40 per cent of its capital, may transfer to the association, in trust for the United States, such securities as may be satisfactory
Of late no question has been before the banking public of greater interest than legislation affecting the currency. Those who favor currency secured only by government bonds, and those who believe in a form of issue based on general assets of the banks, have been equally strenuous in their efforts to impress their views upon the legislators who admit generally that to a large extent their knowledge of the currency question is derived not from practical banking experience, but from consultation with others more closely in touch with the financial affairs of the nation.
From the first a determined effort was made to accomplish some form of currency legislation at the session of Congress which recently closed. This seemed at first to be extremely necessary, as, when Congress first convened, the recent experience of the panic had thoroughly impressed a great share of the business world with a desire to accomplish some legislation which would not only alleviate the situation, as it then existed, but provide a means for the prevention of future experiences of a similar character. In fact, so urgent at one time Was the necessity for legislation deemed that many desired to have an extra session of Congress called. However, as financial matters gradually and naturally righted themselves, and instead of a stringency in the money market there developed, as usually occurs succeeding a panic, a condition of surplus funds, the immediate necessity for legislation seemed gradually to pass away so far as any provision for emergency currency || was concerned. Many bankers believed that №1 there would be no difficulty in the immediate II future as to the supply of currency, and the feel- T ing became quite general, in our part of the country at least, that perhaps the only legislation which would be of especial value would be that providing for a commission which should be empowered to carefully investigate all of the conditions in any way bearing upon the subject, and which should seek expert opinion and advice and prepare some measure for future consideration by Congress thoroughly revising and modernizing our antiquated and inadequate system of bank circulation.
However, great pressure was brought to bear upon the members of both the senate and the house to get together and enact some form of emergency currency law' which, though it might not be necessary'־ from the bankers’ standpoint, yret might be very desirable as a matter of political expediency, in the belief that something ought to be done to have at least a sentimental effect in preventing future money panics. We have, as a result, the Ald-rich-Vreeland bill which became a law on May 30, 1908. I will attempt to review its salient features.
Emergency circulation may be secured by any national bank which has a surplus of not less than "20 per cent of its capital, and which has already taken out circulation through the pledge of United States bonds to the extent of 40 per cent of its capital, in one of two ways.
The simplest method is through a deposit direct with the treasury through application to the Comptroller of the Currency of bonds or other interest bearing obligations of any state, city, town, county or other legally constituted municipality or district of the United States, against which emergency circulation may be taken out, limited in amount by the requirements above stated, and also not to ex-