[Volume XXVII
THE CHICAGO BANKER
28
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the output of some $730,000,000 of 2 per cent bonds, and thereby safeguard the government’s credit. Matters would seem to have reached a deplorable state if the government credit has to take such a form of relief. I think this proposition would lead to a suspense in the public mind that would cause a further depreciation in price of bonds long before the deposits of postal savings banks could absorb them. As a plan for safeguarding the prices of 2 per cent bonds, I suggested in a letter of July last to Senator Aldrich that the time has now come for the limitation of United States bond issues to be used as a basis for currency issue.
The point might be made that the Aldrich-Vreeland bill permits the acceptance of bonds other than government for temporary security for emergency currency, that it would be unjust to deny to a new issue of 3 per cents equal note circulation privileges to other bonds than those of the United States.
It must be taken into consideration, however, that the use of bonds for emergency circulation not exceeding six months is far different than making them a permanent basis for the guaranty of note circulation.
The advocates of a central bank of issue are bitter in their opposition for the discontinuance of bond issues as a basis for note circulation, and besides, they contend that a plan should be made for their entire elimination and thus eliminate in time the bond currency. If the refunding of the 2 per cent bonds be made, as suggested, there might be coupled with this authority that all the present national banks have their charters extended, so as to date from the time of the new refunding act, and that the government could take to itself the right to redeem and destroy all bonds of failed banks and all bonds of banks going into liquidation, and that after 20 years it could limit to existing banks only 50 per cent of their capital to continue as investment of bonds for note issue. This would gradually protect the credit and eliminate the bond issue in a much more natural way than to provide for the extraordinary experiment that a postal bank system would accumulate enough of its deposits to absorb the bonds.
This would seem to be the normal view of the practical banker or a government financier. I think too much dependence is placed upon the large deposits that are made in postal savings banks by foreigners. My experience as internal revenue collector convinced me that
in teaching the farmer, the mechanic and the merchant, who are frequently stockholders in such institutions, how to do business under corporate law. In the recent panic, the smaller banks took care of themselves. They had a larger share, proportionately, of cash reserve than the larger and more pretentious banks.
As an illustration of the growth of the smaller banks, I will cite the case of Pennsylvania, which last November, had 149 national banks of $25,000 capital. The aggregate deposits were more than $17,000,000, while in many cases the deposits range from $250,000 to $485,000 and the average was $139,500 to a bank.
This experience is most striking and convincing. The statement is frequently made that we need a “large supplementary bank” of issue established with branch banks. This plan perhaps met the necessities of sixty years ago when there was inadequate capital for the cities and towns, and little or no capital for the country districts. Then branch banks were beneficial because they possessed a stability of credit, the result of years of operation, that a new community could not command. Therefore, the demand notes without interest of a bank were circulated in the country districts in exchange for individual or corporate notes, guaranteed by indorsements or security, with interest. That is, the banker exchanged his demand note, without interest, for the borrower’s note with interest, and guaranty by the indorser. Since then the country has been opened up and settled. Great activities have produced marked accumulations of wealth and it is the country banks that feed the city with their large deposits. Therefore, the country banks do not need the kind of credit that was formerly extended by branch banks. All they want is the opportunity to use their aggregate wealth to establish a bank with capital large enough to accommodate the community, initiated and controlled by themselves.
I do not believe it easy to convince the people that the national banks should be deprived of the right to issue their own notes, rather than be dominated by any central authority of bankers.
The extraordinary suggestion has been put out that in order to prevent further depreciation of the 2 per cent bonds, that experimental legislation authorizing the establishment of postal savings banks should be enacted, so that the money savings of the people might absorb
Difficulties That Confront a Central National Bank
(Continued from page 6) balance represented by the general assets or credits of the bank. The question at once occurs whether the privilege to give a central bank 65 per cent credit currency will not be regarded as an unjust discrimination against the national bank which provides collateral for every dollar of currency issued, and at the same time upholds the credit of the government and lessens the tax on interest-bearing security by the low rate of interest the 2 per cent bond insures.
It is also a question whether the currency of this bank should be distinct in itself, or whether it should be known as U. S. issue. At any rate we do not want any more multiplicity of issues that will add to the confusion.
I have for a long time advocated the uniformity of a currency that would displace the “greenbacks,” silver certificates, and national bank notes, in the form of a note to be known as United States bank currency. This, of course, involves in its readjustment, a prodigious change in our monetary system. It may be said by the advocates of a central bank credit currency that the United States government has now outstanding $346,000,000 of demand notes known as “greenbacks,” against which there are $150,000,000 gold reserve, equal to about 45 per cent. But it must be remembered that the credit of the government is pledged for the redemption of the greenbacks, while the credit currency of the proposed central bank, outside of the 35 per cent coin deposit, would depend upon the resources of the bank.
The people of the United States have become educated in the belief that the government is not only behind all the metal money of the country, but equally so behind all the paper money; that both represent value and responsibility, and it is a very serious question whether “the voters” of the United States would ever consent to anything but a government guaranty of currency issue.
The smaller national banks of $25,000 to $50,000 capital have proved their worth in the suburban districts. They are very great factors in preventing a decline of prosperity in the old town by giving banking privileges that inspire new investments, and in new communities they are great factors in developing business. They also have a great educational value