support their credit. In July and August the bank reserves piled up till they were becoming a source of possible weakness. When the Panama Canal purchase was to be settled for, when the government revenues began to fall off, instead of demanding a return of loans to the banks, and thus reducing the large surplus reserves which the banks had accumulated and of which they were complaining, the government preferred still further to reduce the reserves in its Treasury vaults, calling on the banks for only such an amount as seemed necessary. During the month of September there was a gradual withdrawal of bank reserves to supply the business need. Under circumstances of weakening bank reserves and of gradually decreasing revenue of government, with the consequent disappearing of the Treasury surplus, the banks may not only be deprived of collateral aid in time of financial stress, but may be required even still further to weaken their money reserves by making payments to the government. Under such circumstances, the banks would be left to their own resources, with the government money demand as well as the public money demand to supply. The result would be that in their own protection the banks would be forced to contract business accommodation in such a way as to make the present practice positively dangerous.

At no time in the history of banking were the time and circumstances more opportune for Treasury support to banks than in 1902 and 1903. At no time in our history might the Secretary more wisely have withdrawn the government deposits than in July and August, 1904, when the money rescrves were piling up in the vaults of the banks. The effect of failure to do this has been twofold: (1) the cheapness of money has caused an exportation of gold; (2) the low rate of call loans has caused speculation. In September we have had the result made apparent-a concurrent flow of money to the interior and abroad, and at the same time an increase in speculative activity. Thus we again have a period of increasing credit expansion and decreasing bank reserves. These movements have not proved threatening, it is true, but there seems at least a possibility that the banks may again call on the Treasury for collateral aid before another season is past, and under conditions which would require the Treasury to turn a deaf ear. Following a practice by which the government loans its surplus to the banks

without interest or at a rate below the market, the continued aid of the Treasury to the banks may depend on the exercise of discretion by the Secretary. If, however, the government were to charge the bank, not an exorbitant rate, as would a money-lender in time of stress, but the usual commercial rate, the banks would promptly return the loan when money falls below the usual price. No longer would it be the marvel of European bankers that the call money rate may within a day rise to phenomenal heights. While the government was in the attitude of offering to loan at five per cent. the rate could not rise far above this figure. In ether case, whether by exercise of official discretion or by chargirg a rate which would make the restoration of reserves autonomous, the Treasury support to the system would not be weakened. On the other hand the money market would be steadied.

But even if the Treasury never had a surplus to loan to the banks in periods of emergency, we have in our present system possibilities for increasing circulation for current needs that are not inherent in foreign systems. This is in the so-called issues of banks. If the bank has unencumbered resources (mind you, unencumbered resources) necessary to obtain a government "deposit loan," these same resources may be pledged for a loan from the government in the form of "bank-notes." July 1, 1904, the Treasury reported that there were $449,000,000 of bank-notes in the hands of the banks or in circulation. These issues alone were more than ample to meet all fluctuation money demands of the country. The only trouble is (as in the case of a permanent policy of depositing government surplus with the banks) that, when the banks are in trouble, notes are not available. Like the government deposits, they have already been absorbed in current circulation, have all been used to support the ordinary banking operations during periods of low noney demand, and in time of strain the banks have their best securities tied up for funds with which to do business when there is no strain to be met. In time of extraordinary demand they are 'eft helpless.

Why should this be so? Why might not these notes be used in such a way as to permit an increase of at least $400,000,000 in money circulation, and a simultaneous increase of at least $1,600,000,000 ofbank credit accounts at any time that an extraordinary de

mand might be made for funds? Many bankers have suggested, as a way out of the difficulty, that a tax be placed on issues. Secretary Shaw, in his Chicago address of a year ago, pointed to this. Require the banks to pay a tax equal to the commercial rate of interest (let us say 5 or 6 per cent.) on all issues over and above a determined minimum-or call it interest on the "issue loan" of the government to the banks-and the banks would not encumber their assets except when money demands were above that rate. These suggestions were made with much force. The result may also be predicated from experience. As the trustee of collaterals, and as the department of issue and control of the bank-note, the Treasury might thus lend as much support for the expansion of money circulation and current credit accommodation as the system itself would require without relying at all on its own surplus revenues or credit money reserves.

Aside from making the bank-note circulation in large part an emergency currency, aside from giving elasticity to our national money and credit system, the effect of such a law would be :wofold. By taking a large part of the present issue of bank-notes out of circulation, except when an extraordinary demand arose, the ordinary demand must be supplied, and the amount taken out of circulation must come from some other source. This would necessitate an increase in gold certificates or other forms of money issue. The ordinary money requirement would be met, but it would not be met by bank-notes. The necessary money funds would come either from an increase in issues of government or by importation. The second result that would obtain has a bearing on the financial strength of the banks themselves. If the banks were not encouraged to encumber their best resources in time of low money demand; if, it may be said, they are required to retain their capital in such form as to make it available for support of their credit, and were permitted to deposit "gilt-edged" securities of such kind and quality as might be prescribed by the Treasurer for bank-notes in time of strain, the support which is now given to the credit of government in the form of increased strength to the bond market would then be given to the banking business. In other words, the net result would be an increase of banking capital for banking

purposes-a result which in itself would be desirable as a means of supporting greater elasticity in credit accommodation.

Another conservative principle is contained in the American system that is not afforded by that of any other country. As the one institution permitted to issue credit money, the Treasury gives to the people a form of currency more convenient in use than gold and less expensive to itself. The silver dollar, the greenback, the silver certificate, etc., cost the people who use them just as much as gold coin or certificates, but the cost of these credit moneys to the government is less. By means of their issue the government is able to carry on its own business and to decrease its interest-bearing debt about $600,000,000. What the Treasury stands pledged to do, and what it is necessary for it to do under our system, is to protect these credit issues-i. e., to make payment in gold when gold is demanded. So long as no doubt arises as to this, there can be no financial disturbance on that account. But there may be a distinct advantage to the money and credit system. If at any time our foreign balances demanding settlement become so great as to cause a drain on bankers' gold reserves, it may become necessary to stay the tide of exportation as a means of protecting the credit system. This result will be effected through the demands made by the banks on the United States Treasury for payment of government credit issues. At such time the government will be brought into the gold market as a means of meeting its own demand debt, and gold may be had for the support of credit of the country at a rate more favorable than it could be had by any individual or private banking corporation.

No greater fallacy was ever put forth than that which concludes that a government which is not in the banking or loan business can supply money capital for private business. If all the gold coin of the world were stamped and issued from the United States Mint, so long as the business habits of our people remained the same, no greater amount of gold would find its way into American channels of trade. On the other hand, if the government did not issue or coin a dollar, the people would have the same amount of money which they now have with which to do business. Our circulation would not increase or decrease in either case. Instead of buying gold and taking it to the mint, we might buy foreign coins; instead

of retaining the currency issued by the government or that put out in payment of its own obligations, we might have some other form of currency. But the usual amount of currency would be supplied from one source or another by coinage, by issue or by importation, in exchange for products of our mines, our manufactures, etc. What the government can do and does do is to make the funds ordinarily needed conform to a standard adopted for our own use, and to protect these in their financial and physical integrity against impairment. More than this, the government may provide a means by which extraordinary demands for money may be met without resort to importation. It may make provision for meeting this fluctuating demand; it may make this extraordinary money supply more readily obtainable than might be if our traders and manufacturers were required to go abroad for it. This may be done either by direct loans of money to the banks from the Treasury reserves, or by temporary credit money issues to the banks. Instead of the banks pledging securities abroad, the way should be opened to pledge them with the Treasury and thereby obtain any amount of money for such extraordinary circulation that is needed without disturbing domestic and foreign trade. And for this purpose no system is so well adapted as the American system, having for its main supports the two independent financial institutions-the independent commercial bank and the independent Treasury, the one representing the financial resources of fifteen thousand independent banking constituencies, the other representing the combined resources of the nation.

CURRENCY REFORM

ADDRESS DELIVERED BY LESLIE M. SHAW, SECRETARY OF THE TREASURY, BEFORE THE OHIO BANKERS' ASSOCIATION, AT CLEVELAND, SEPTEMBER 28, 1905.

THE fact, and I think it is a fact, that the United States has the best currency system in the world, does not imply that the currency system of the United States is perfect or that it cannot be improved. It is as safe as any system in the world because it is established on the only safe basis known to man-the gold standard. It is not