[Volume XXV
THE CHICAGO BANKER
22
comptrollers’ reports show that since the change in our national bank act in 1900. which enabled banks to be organized with a capital of $25,000, the increase in our bond secured circulation has been almost 445 million dollars, hence, it will be seen how easily we may have inflation with a currency founded on government debt. This bond secured currency not being based on a gold reserve, has the tendency to force gold from the country to make room for such expansion, though bank credits are protected with a reserve and hence, notes issued against them would not afford expansion.
By referring to the financial history of our country, we are amazed to find that our public debt was reduced $1,105,000,000 between 1879 and 1890, a remarkable showing unequaled by any nation on the globe, particularly so since the total indebtedness of the government was less than $2,000.000.000 in 1879. It will readily be seen that such a reduction in outstanding bonds would have a telling effect in increasing their price and indeed this is what
This important subject has been carefully covered by Arthur Reynolds of I)es Moines, member of the currency commission, for the Chicago Banker, and will be printed in three parts	::	::
as is customary, and hence, it would be a suspension of payment. It will readily be seen that instead of allaying public feeling, the use of emergency currency would upset the ordinary course of business and alarm the people.
In order to present the ideas on currency reform most prominently before the public today, I have outlined the four important plans now under discussion, as follows :
1 irst. Our bond secured currency with no need for a change.
Second. A currency secured by segregated assets, bonds or commercial paper or both.
Third. A central bank.
Fourth. Uncovered credit notes.
Our Bond Secured Circulation
Our bond secured circulation is based upon the purchase and sale of government bonds, and hence, is regulated more by the price of bonds than the need for currency. Banks do not avail themselves of the full privilege of issue, on account of the inconvenience and frequent losses entailed in the regulation of their note issues.
If redemption places were provided no more than twenty-four hours distant from the issuing bank, as will later be seen the suggestion of the commission for uncovered credit notes, the bond secured bills would be promptly redeemed. But in view of the fact that there is only about 1 per cent profit in the issue and banks pay a tax of one-half of 1 per cent upon outstanding circulation, if any considerable amount were redeemed and the same carried in the vaults of the banks, the remaining amount in circulation would be carried without profit, if not at a direct loss. So the banks would all be forced to sell their bonds, and w׳ith the market in a state of flux, severe loss would ensue, and when the active season approached, many banks would want to issue at one time. Hence, the price of bonds would advance beyond their ordinary selling value, and it will readily be seen that with a loss to face, both in the issue and retirement of the bond secured circulation, banks could not afford to, and would not issue it. This demonstrates that our present bond secured circulation with a proper system of redemption, would still be inadequate.
Under the present law, the $9,000,000 restriction placed upon the retirement of bond secured circulation in any one month prevents elasticity, and makes our currency perfectly rigid, tending toward inflation. Banks must take their turn in the method of retirement provided. Indeed the average period a bond secured note has stayed out in the past is about two years.
Many new national banks are being organized, this is particularly true in my own state, and if our prosperity continues, it will encourage still greater activity along this line. This will create a greater demand for bonds, and unless the government is increasing its issue, bonds w ill command a higher price, necessarily reducing the profit on circulation. This will create a retirement of currency even at a time when an increased supply is needed.
It will be seen that as the government debt is expanded, in a like proportion we have inflation of our currency irrespective of our commercial needs for it. Also as the government revenues increase and a surplus is built up, contraction may occur through the redemption of bonds "by the government. The
(PART TWO.)
The Vreeland part of the new bill relates to emergency currency issued through the establishment of voluntary national clearing houses, wdiich provides that any ten or more national banking associations, each having an unimpaired capital, and a surplus of not less than 20 per cent aggregating at least five million dollars, may form such voluntary clearinghouses for the purpose of issuing emergency circulation secured by commercial paper and general bank assets.
Before a bank can issue currency secured by commercial paper, etc., it must have United States bond secitred circulation of not less than 40 per cent of the capital stock, its capital being unimpaired and having a surplus of 20 per cent. It may then deposit securities in trust with the clearing house, and upon approval of the Secretary of the Treasury, may receive 75 per cent of the cash value of the securities or commercial paper so deposited. Should any state, county or municipal bonds be deposited they may receive notes to the extent of 90 per cent of market value, thereby favoring the use of bonds׳ in the amount of permitted issue.
No bank can in any event issue circulating-notes under this part of the bill beyond 30 per cent of the unimpaired capital and surplus, commercial paper must have two responsible signers and run not longer than four months. While all banks in the association are severally liable, they cannot however, be held beyond the proportion that their capital and surplus Itears to the aggregate capital and surplus of all banks in the clearing house.
The association may ask for additional securities or commercial paper, and failing to comply in 10 days, may sell securities held. If a bank fails, the association has the benefit of a prior lien on the assets of such failed bank. The right of sale of assets deposited is given on five days’ notice for failure to keep redemption fund intact, the amount of tax and redemption fund being the same as under bond secured.
It will readily be seen that with a tax of 5 per cent per annum for the first month, and 1 per cent for each additional month, banks would not avail themselves of the issue of notes under this bill except in extreme emergencies. The notes whether secured by United States bonds, other bonds, or commercial paper are to read, “Secured by United States bonds or other security,” and are to contain a promise to pay on demand.
A provision of the new bill enables the Treasury to control government cash by taxing government deposits at not less than 1 per cent per annum which may be increased to compel the return of such deposits.
J. B. Forgan, president of the First National Bank of Chicago, has pointed out that the use of emergency money on the Vreeland plan means cash suspension. ThA bills are to be issued in 5, 10, 20, 50, 100, 500V 1,000, and 10,-000 dollar denominations, the small bills would circulate, the large ones Could only be used in :settling clearing house balances, and hence, would mean suspension of cash payments exactly the same as when clearing house certificates have been used heretofore. Also there would be no incentive to the creditor banks to accept the bills, as they would not bear interest, as has been the practice with clearing house certificates and hence, no profit to the creditor bank, but would be expensive to the issuing bank and the government would wrongfully receive the profit.
When emergency bills were used, banks would have to agree not to present them daily for redemption in gold or legal tender money.