Bank Notes are not Money.-It is proper to call attention to an important distinction between a bank note and other kinds of currency. The silver dollar, the silver certificate, the Treasury note and the United States note are given by law, a function which the bank note does not and ought not to possess, for they are rated as lawful money, so that in the reserves of banks they are counted as the equal of gold itself. Any increase in the supply of such money, therefore, would evidently lead to an increase of the lending power of banks, for part of the new currency would certainly find its way into banking reserves. The bank note, however, except in the vaults of State and private banking institutions, cannot be counted as money. Lying in the vaults of a national bank it is like a promissory note still in the hands of the signer-a piece of dormant or slumbering credit, not constituting a liability of the bank, and without influence upon the prices of either commodities or securities. Bank notes are not money, and should not be given by law any of the prerogatives of money. They are intended to serve merely as a medium of exchange, and the conditions governing their issue, like those now governing the issue of checks, should be such as to call them into existence only when they are needed and to compel their retirement or redemption when their work is done.

Since the national bank note is secured by a deposit of Government bonds, it seems as good "money" as the greenback. Why, then, it is often asked, should it not be treated as money and counted as such in bank reserves? Experience has proved that such a course would be most dangerous. A bank note, no matter what the collateral behind it, is a bank liability, like a certified check, and may at any time necessitate the payment of actual money. To make it legal tender or lawful money would be equivalent to permitting banks to count in their reserves the sums which are due them from other banks. If such a policy were sanctioned by law, there would be practically no limit to the expansion of bank deposits and loans that would be possible without any increase in reserves of actual money. If Bank A were permitted to count the notes of Bank B as lawful money, and Bank B could do the same with the notes of Bank A, the effect would be the same as if banks were suffered to count their own notes in their reserves. This would lead to the conversion of the bonded debt of this country into demand notes like the greenbacks and would not be less dangerous because the conversion would be indirect and disguised, for under such conditions the increase in the volume of bank notes would tend to cause an expulsion of gold, and so endanger the maintenance of the gold standard, quite as effectively as would an increase in the volume of greenbacks.

United States Bonds an Important Factor.-The present currency problem, in our opinion, might be satisfactorily solved in several different ways, yet there is one important consideration which should not be left out of account. The national banks are owners of United States bonds of a face value of over $600,000,000,

and the market valuation of these bonds is largely based on the fact that they are required as security for bank notes. If any other security were substituted, United States bonds would inevitably decline in price. This situation is one of the first and practically one of the important things that must be considered. Those who plan changes in our currency are not free to outline de novo an ideal system, but must always keep before them the fact that the Government bond issues, sustained as they are now by artificial conditions, cannot prudently be left to seek a normal level. Such a course would be unwise in itself, and would with certainty antagonize almost every person interested in a national bank.

A Central Bank of Issue.-In our opinion, the best method of providing an elastic credit currency, the volume of which could never be excessive, would be the creation of a central bank of issue under the control of the Government. This central bank should have branches in the leading cities, and should have dealings only with banks. Although its capital stock might be privately owned or distributed among the banking institutions of the country, it should be under the direct control of a board of governors appointed, at least in part, by the President of the United States, for it should perform some of the functions now imposed upon the United States Treasury, and should at the same time be managed not exclusively for private gain but for the public good as well. This bank should have a large capital, not less than $50,000,000. It should carry a large reserve of gold and should act as custodian of the metallic reserves of the Government and as its agent in redeeming all forms of credit money. It should also be receiving and disbursing agent for the Government, doing at its branches the work now done at the sub-treasuries. It should hold the five per cent. redemption fund now deposited in the Treasury by the national banks for the current redemption of their bond-secured notes, and should redeem national bank notes both at its central office and at all of its branches.

Advantages of a Central Bank.-The operations of central banks in Europe, especially in France, Germany, Austria-Hungary and the Netherlands, make it impossible to doubt that the existence of such a bank in this country would be of incalculable benefit to our financial and business interests. Such a bank in times of stress or emergency would be able by regulation of its note issues to prevent those sudden and great fluctuations in rates of interest which have in the past proved so disastrous. Furthermore, it would have the power to curb dangerous tendencies to speculation and undue expansion, for by the control of its rate of interest and of its issues of notes it would be able to exert great influence upon the money market and upon public opinion. Such power is not now possessed by any institution in the United States. Under our present system of independent banks, there is no centralization of financial responsibility, so that in times of dangerous over-expansion no united effort can be made to impose a check which will

prevent reaction and depression. This is what a large central bank would be in a position to do most effectively. A central note issuing bank would supply an elastic currency varying automatically with the needs of the country. This currency could never be in excess, for notes not needed by the country would be presented for deposit or redemption.

Resumé of Advantages.-The advantages of such a central bank, in brief, would be as follows :

(1.) It would supply the country with an elastic currency responsive to the varying needs of business.

(2.) It would tend to steady the rate of interest at all seasons, and to give relief in periods of industrial and financial stress, for its large resources would enable it to meet extraordinary and sudden demands for both capital and currency.

(3.) It would relieve the Federal Treasury of the duties now imposed upon the Division of Issue and Redemption, and, on account of its intimate relations with the money market, would be in a position, as the Treasury is not, to protect itself against a prolonged drain upon its reserves.

(4.) It would do away with the cumbersome sub-treasury system and keep the money of the country always at the dispoeal of trade and commerce, so that the Government's collections and disbursements would cause neither contraction nor inflation.

In this connection we beg you to give careful attention to the able letters from distinguished European financiers which are submitted with this report. These letters clearly set forth the beneficial operations of the great central banking institutions of Germany, France, Austria-Hungary and the Netherlands. The data they supply in the case of Germany and Austria-Hungary show the operation of a credit-currency issued under a special tax to have been strikingly beneficial in maintaining moderate rates of interest during the periods of moving the crops and making the quarterly settlements.

Modification of the Existing System.-If for any reason, political or financial, the establishment of a central bank of issue is not advisable, your Committee would recommend the adoption of some plan whereby additional powers of note-issue shall be extended to national banks. As already has been said, the greatest defect of the present bank note system is the fact that its volume bears no relation to the demand for currency. No permanent increase of the stock of our credit money is called for. Indeed, any such increase would be attended with risk, for it might cause an expulsion of gold in such large quantities as to provoke lack of con

fidence in the maintenance of the gold standard. Your Committee would emphasize this point. Inflation is even more dangerous than contraction, for its perils, being usually masked by a fictitious prosperity, are often unnoted and ignored until great harm has been done. Certainly no measure should be taken to encourage it. What is needed is not a permanent increase of the currency, but the addition of a variable element issued and redeemed under such conditions that its supply shall exactly correspond with changes in the demand for currency.

If this variable element is to be issued by existing national banks, it is clear that the motive for its issue must be independent of those investment considerations regarding bonds which now render the national bank circulation unresponsive to the fluctuating demand for currency. The quantity of such notes which a bank may issue should not bear an unvarying ratio to the amount of its bond-secured circulation. It is proper, in our opinion, to require a national bank to invest a certain proportion of its capital in Government bonds as a pre-requisite to the right to issue creditcurrency, but the amount of such currency that may be issued should not be based in any fixed proportion upon the amount of bonde held. Merely to permit a bank to increase the proportionate amount of its circulation based upon bonds would not achieve the desired result, for banks would so order their holding of bonds as to get into circulation all that the law permitted, and would then be unable to put out additional notes unless they obtained additional bonds.

No Substitution for Bond-Secured Notes.-It should not be possible for banks to substitute this new credit currency for their present bond-secured circulation to such an extent as to lead to extensive sales of Government bonds by the banks and to the depression of their market value. Legislation leading to such a result would be tantamount to a violation of vested interests, and almost certain to enlist the hostility of banks. Any such result may be avoided by the provision that no bank shall have the right to issue credit currency unless its bond-secured circulation amounts to a definite proportion of its capital, say 50 per cent. The bondsecured circulation of the national banks at the present time equals about 60 per cent. of their total capital. Some banks have issued circulation much in excess of 50 per cent. of their capital, while ochers have issued only the minimum required by law, which is in no case more than 25 per cent. of capital. If the right to issue credit-currency were extended only to banks whose bond-secured circulation equals 50 per cent. of their capital, while some banks might be under an inducement to sell part of their bonds, others would be under a similar inducement to increase their holdings and no serious disturbance of the bond market would be likely to

ensue.

Proposed Limit of 1ssue.-Banks should be permitted by law, as at present, to issue bond-secured circulation to the full amount

of their capital, and no bank should be under any compulsion to issue the new credit currency to be provided for, or to assume any responsibilities not imposed by existing law.

The amount of credit currency which a bank may issue should bear a fixed proportion to its capital stock. Estimating the amount of new currency needed by the country during the crop-moving season at $150,000,000, which is about 20 per cent. of the present capitalization of national banks, it would seem that an adequate supply of new currency would be provided in the fall if banks were permitted to issue, in addition to their bond-secured circulation, notes equal to 25 per cent. of their capital stock. But as some banks might not avail themselves of the privilege, and as others would doubtless succeed in substituting these new notes for a portion of their present bond-secured notes, it is probable that the limit of issue might well be fixed at 35 per cent. of a bank's capital.

In order that there shall be no over-issue or inflation the following preventive measures are to be recommended:

Adequate Facilities for Redemption.--(1.) That there should be convenient and adequate facilities for the redemption of bank notes is of the first importance. These could be assured by the provision that notes of every national bank should be redeemable at sub-treasuries and other convenient points. The redemption of bank notes should be so easy and inexpensive that none would remain in circulation after the need for them is past. At the present time the only general redemption agency for national bank notes is in Washington. On account of the location of that city, banks west of the Alleghany Mountains send in very few notes of other banks for redemption, but prefer to treat them as counter money, even though they have an excessive supply on hand, rather than incur the expense and loss of interest incident to their shipment to Washington for redemption. The records of the Redemption Bureau at Washington show that nearly 60 per cent. of the notes presented for redemption come from New York City alone. Of the remaining 40 per cent. about one-half come from Philadelphia, Baltimore and other eastern cities. If the volume of bank notes is to vary sensitively and automatically with the need for them, there must be incessant daily redemption, and this can be had only when the redemption points are so numerous that no bank will be more than 24 hours distant from one. When a properly distributed redemption system is in operation few banks will voluntarily pay out the notes of other banks; for it will be to the advantage of each bank to pay out its own notes and send in the notes of other banks for redemption in lawful money, thus increasing its reserve and multiplying its power to make loans. So important is the prompt redemption of notes that if it were practicable we would favor a law prohibiting national banks from paying out the notes of other banks whenever received from individual depositors.