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which would have been thrown upon the Safety Fund, if it had been originally established in its finally perfected form, would have been less than $550,000, an amount which would have been met by an average annual assessment of less than one tenth of 1 per cent upon the capital.

Other applications of the safety-fund principle to the guaranty of notes in the United States were to be found in the statebank systems of Ohio and Iowa, which appear to have given entire satisfaction. Vermont, also, in 1831 adopted a system quite similar to that of New York, but a few years later permitted the banks to substitute in place of contributions to the common insurance fund, the personal bonds of the stockholders of any bank to redeem its notes.

The only banking system in which a guaranty-fund provision is actually incorporated at the present time is that of Canada. According to the terms of the banking law of 1890, the notes are made a first charge upon all the assets of the issuing bank, including the double liability of stockholders. In addition to this, banks are required to keep on deposit with the Minister of Finance a sum equal to 5 per cent of the average amount of their notes outstanding during the fiscal year preceding. In case of the suspension of any bank, its notes outstanding draw interest at 6 per cent from the date of suspension until the date set for their redemption. If such a day is not fixed by the directors of the bank within two months from suspension, the Minister of Finance is authorized to appoint a date upon and after which they will be redeemed from the redemption fund. Until the fund is made good from the assets of the failed banks, all the banks of the system are required to contribute in their due proportion at a rate not exceeding 1 per cent on their circulation each year.

the assets by the receivers had reduced the outstanding amounts to $7598 for the Bank of Orleans, $10,744 for the Reciprocity Bank, and $18,715 for the Yates County Bank.

In his report for 1867 the Comptroller of the State of New York stated the then outstanding circulation of these four banks to be $129,499. Notice was given that these notes would be redeemed from the surplus of the Bank Fund then remaining, and all that were presented were redeemed in full. Many of them, however, were never presented,

Since the establishment of this system in 1890 but two bank failures have occurred. In the case of the second failure, the notes of the bank were redeemed by the bank itself, without recourse to the redemption fund. In the case of the earlier one, the liability at the end of two months fell upon the redemption fund, though even here no notes were really presented for redemption from it. No doubt, however, was felt concerning the goodness of the notes, and inasmuch as they drew interest at 6 per cent from the date of suspension, they were regarded rather favorably as an investment, and were readily received by banks and others.

The successful working of insurance against loss upon bank notes, as embodied in the safety-fund idea, has thus been shown to be possible by experience. In the instances just cited, it either succeeded absolutely in securing note holders against loss, or demonstrated its ability to do so if properly applied and supplemented by adequate auxiliary measures, such as limitation of note issue, stockholders' liability, and a first lien on assets in favor of notes.

We need not, however, depend solely upon actual experience in the case of banking systems which have put the principle specifically into operation. The theory of insurance is sufficiently worked out to allow a judgment as to the possibility of its application to any class of risks, provided only that adequate statistics upon which to base a judgment can be found. With the safeguards and precautions which are being increasingly thrown about the business of banking, it is improbable that in the future failures of national banks would exceed those of the past. Even though, under the plan proposed in this report, a stimulus might be given to the establishment of banks in sections where business conditions were so unsettled as to make the danger of failure greater than the past average, this possibility of an increase of failures will unquestionably be more than offset by the general improvement due to the more rigid and thorough investigations provided for. With the discretion lodged with the comptroller, no bank can be started where it is not clearly shown that the bank is established in good faith and that the capital has been

fully paid up. The names of the directors must be given, and the comptroller will be in a position to refuse his approval of any application where the directors are not men of good reputation. There will thus be no more opportunity for fraud than under the present system. Our past experience, therefore, offers sufficient data upon which to base a judgment regarding the applicability of the insurance principle in the form of a safety fund to guard against losses to note holders under the proposed system. The results of an examination of this experience will be given elsewhere in the section on Insolvency of National Banks.

The guaranty-fund provision recommended by the Commission may be briefly described as follows:

Each bank must at all times maintain on deposit with the Division of Issue and Redemption an amount in gold equal to 5 per cent of its outstanding circulation. This will most naturally be administered precisely as the 5 per cent redemption fund is now. At the start each bank will be required to put up an amount equal to 5 per cent of its outstanding circulation, and thereafter, when it takes out an additional amount of notes, it will be required to pay into the Treasury 5 per cent of such notes for its redemption fund, and another 5 per cent for the guaranty fund; and whenever it returns any of its notes for cancellation, or deposits lawful money for their withdrawal, it will receive back from the Treasury 10 per cent of the amount of circulation so retired, 5 per cent from each fund.1

1 The considerations which led to this method of adjusting the fund were these. It seemed very desirable that the fund should, in the early years of the new system, be of sufficient size to inspire confidence in the redemption of the notes of every failed bank. The project to accumulate a fund by imposing an annual tax of per cent, or 1 per cent, had, therefore, to be abandoned at the outset, since it would have left the fund small, and, possibly, insufficient in the early years.

Another favorite proposition has been to establish a fund by requiring each bank to contribute an amount equal to 3 per cent, or 5 per cent, of the circulation taken out, but making no provision for the return to the bank of any portion of such sum in case of the retirement of the circulation. This proposition likewise had to be abandoned, for it appeared that such an arrangement would tend to retard the issue of currency when demanded by temporary business needs; for no bank which could not expect the additional circulation thus called for to remain outstanding for more than a few weeks, or at most a few months, would be willing to go to the expense of paying an assessment of 3 per cent outright

These contributions will aggregate a large sum, which will be available at all times for the redemption of the notes of any individual failed bank without the necessity of waiting until its assets are turned into cash. All notes of such a bank presented for redemption will be promptly paid from this fund, and the notes merely held in the Treasury as a part of the fund until they can be paid by the receiver from the assets of the bank. In the meantime they would be regarded as the investment of a portion of the fund. If, when the affairs of any failed bank were finally wound up it should appear that the total net collections had been insufficient to redeem all its notes, the other banks of the system would be assessed whatever amount would be necessary to meet the deficiency.

in order to get the notes. If the currency were outstanding for only two months, this would be equivalent to 18 per cent per annum, a rate which would make the issue of notes out of the question, and necessitate some makeshift such as resort to borrowing currency wherever it might be secured, as at present. Such a proposition therefore, if carried into effect, would have seriously hindered that proper adjustment of supply of currency to business needs which the Commission endeavored to bring about.

The Canadian system, in which the banks maintain throughout each year an amount equal to 5 per cent of the average outstanding circulation for the previous year, was also decided to be inapplicable, because with so many banks as there are in the national-banking system, and the great changes frequently taking place in their circulation, it would frequently happen under such a system, that a bank having in one year only a very small circulation, would be enabled to put out in the next year a very much larger amount of notes without increasing its contribution to the guaranty fund correspondingly.

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The rapidity with which exports of American products have increased in recent years has served, naturally enough, to stimulate discussion concerning the unprecedented balance of trade which now stands in "favor" of the United States. Not a few writers seem to believe that the extraordinary excess of exports over imports has made our foreign trade peculiarly profitable to the country, and there has been a marked revival of some of those theories which are associated with the name of the mercantile school of the seventeenth and eighteenth centuries. Such conditions will justify renewed study of that time-worn topic, the "Balance of Trade."

I

Mercantilism arose in the period when the precious metals discovered in the New World began to find their way into circulation in the various countries of Europe. One cardinal tenet of the school was that the statesman must exercise special care to secure for his country a sufficient stock of treasure in silver and gold. Spain and Portugal received directly from their colonies the riches that the treasure ships brought each year from the Indies; but England and other countries,, whose dependencies contained no mines of the precious metals, could, manifestly, obtain new supplies of specie only by way of trade. For this reason, an excess of exports over imports, which might be settled by an inflow of gold or silver, was considered a "favorable" balance of trade, and became an object of solicitude to statesmen and to writers upon economic subjects.

1 By C. J. Bullock. Reprinted, by permission of the publisher, from the North American Review, July, 1901.

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