(4) BANK NOTES UNDER THE NATIONAL BANKING SYSTEM 125. REASONS FOR ESTABLISHING THE NATIONAL BY ANDREW MCFARLAND DAVIS Mr. Sherman advocated the bill because it would furnish a uniform currency; because it would create a market for bonds; because through the sale of bonds thus effected the nation would be consolidated; because it would furnish depositories for public funds, and because the bills could be used in payment of taxes. Greenbacks he considered not suitable for the desired uniform currency, because they were liable to inflation. The more of them that were put out the greater had been the emissions of state banks. "The consequence has been," he said, "that while the Government has been issuing its paper money, some of the banks have also been inflating the currency by issuing paper money on the basis of United States money. There is no way to check this except by one uniform currency system." What benefit, he asked, does the United States obtain from this system? "The first benefit is, there is a market furnished for the bonds of the United States. Then banks must furnish 10 per cent more of the bonds of the United States than they receive in paper money. This at once, if the full amount is issued, which I do not anticipate within a year, will furnish a market for $330,000,000 of bonds, and we know very well by the laws of supply and demand that where a demand is made for a given article the demand extends far beyond the particular want." He thought the passage of the bill would "promote a sentiment of nationality," the want of which was one of the evils of the times. 126. EVILS OF NON-UNIFORM ISSUES BY ANDREW MCFARLAND DAVIS The Chicago Tribune on February 13, 1863, states that "Every one of the 1,395 banks in the loyal states has its separately engraved and printed notes, differing more or less in form or design pictorially, Adapted from The Origin of the National Banking System, pp. 79-80. (National Monetary Commission, 1910.) 2 Ibid., pp. 25-26. and each bank issues the various denominations which by usage seem to have become the rule. "Taken together, each bank issues bills of at least six different denominations. The 1,395 banks therefore issue 8,370 varieties of notes, which people are expected to distinguish from counterfeits. Moreover, the varied issues of the fraudulent, broken, and worthless banks should not be overlooked. Of this class of 'retired' banks, as they were styled, 854 are enumerated in the published list furnished by the 'descriptive list' for January, 1863. Such as these have therefore contributed their quota to this promiscuous catalogue. "One phase of our paper currency engendered by this multiform system calls for special notice and consideration. We refer to counterfeiting. It may be safely stated that the art, as pursued in the United States, is without parallel, and that, without vaunt or hyperbole, we can 'beat the world' on this, our national specialty-counterfeiting. A species of literature, even unknown to the rest of the world, has been initiated among us, and no merchant or mechanic deems himself safe unless he consults the Counterfeit Detector. The absolute facts, as detailed by those interested in keeping the record of counterfeits, appear monstrous and fabulous even beyond credence. Of the various kinds it is estimated that there are about six thousand. Of the various species of 'counterfeits,' as they are called, it is ascertained that but a small part of those in circulation is composed of bona fide imitations of the genuine notes. Those known as alterations number highest. One cause of this multiplicity of altered notes is attributable to the similarity of titles among banks in different sections of the country. As, for instance, we find 27 Union banks, of which 7 are in the State of New York. A yet further aid to 'alterations' is in the frequent use of the same devices on notes of different banks, and often of different banks of the same name." Although the picture is drawn at a later date than that which we are at present considering, nevertheless it is equally true for the year 1861, and must be accepted as such. A writer in the Bankers' Magazine, in November, 1862, stated that experienced New York bankers and a former bank-note engraver were unable to detect certain fraudulent notes. His conclusion was: "If experts such as bank tellers and bank-note engravers are so readily deceived by well-executed fraudulent bills, it cannot be expected that merchants, traders, and others will be prepared to detect such frauds." 127. THE PROTEST AGAINST NATIONAL BANK ISSUES1 BY HORACE BOIES "Whom the gods would destroy they first make mad." The currency of a country is the lifeblood of its business interests. Taint it in a single artery or a lesser vein and the whole system is diseased. Our national banking system was the offspring of a naked treasury and overwhelming debt. Through all the years of its existence it has been nursed and fondled by indulgent representatives of a great republic. It was conceived in one of the darkest hours of the nation's financial history, the child of an overpowering necessity that could stop at nothing but some form of national relief. In its swaddling clothes it was a meek and pleading thing, grateful for any crumbs that fell from its master's table. Today it is the autocrat of all the states. It no longer stands at the doors of Congress asking alms at its hands. It comes as a victor now, with all its plans matured, its measures formulated by a little coterie of men within its folds, dictates such changes in the nation's laws as its own selfish interests require, and a fawning majority of a committee in Congress, to which its measures are referred, hasten to obey its will. By the original act authorizing the incorporation of national banks each of these institutions was required to purchase and deposit with the Secretary of the Treasury, to be held by the government as security for the payment of its outstanding notes, United States bonds. These bonds were interest-bearing obligations of the government, the interest on which was paid to the banks the same as it was paid to other holders of like securities. Upon such deposit the bank was authorized to issue and put in circulation as money its own notes up to 90 per cent of the face value of the bonds deposited. To secure the prompt redemption of its notes on demand each bank was also required to keep on hand a reserve in lawful money of the United States equal to 25 per cent of its own outstanding notes. The effect of these provisions was to enable a private corporation to coin the credit of the nation into something that, for every practical 'Adapted from "Why Not Government Currency?" Moody's Magazine, III (1906–7), 299–300. use of its own, was money at the ratio of $4 for every $1 of its own money it was required to lock up in its own vaults. The same provisions authorized the bank to receive the money of others, invest it as its officers saw fit, subject only to the requirement that it should keep on hand in its own vaults 25 per cent of these deposits, in lawful money, with which to meet demands of depositors for their money as the same were made. They accomplished this further end. They withdrew from circulation the legal tender money of the country equal to 25 per cent of the outstanding bills of all the national banks of the country thereafter to be organized, and 25 per cent also of all deposits in all of these banks, and left the enormous vacuum occasioned by such withdrawals to be filled by the notes of these banks, and in no other possible way. On the 24th of September last, as shown by the report of the Comptroller of the Currency, the aggregate of these deposits was almost five billions of dollars, requiring a withdrawal from circulation of the legal tender money of the country of nearly $1,250,000,000. But, liberal as these provisions were, they did not satisfy these corporations. They first asked and obtained from Congress leave to invest their own notes up to the face value of the bonds they had deposited, and they then asked and obtained leave to withdraw their reserve of 25 per cent of their outstanding notes that they might utilize the same to the best advantage possible, instead of having it tied up in their own vaults. When they had accomplished this they had not a dollar invested in their business that was not interest-bearing, payable to themselves, and they had appropriated sufficient of the nation's credit to enable them to issue and put in circulation, as money, a sum of their own notes equal to the entire face value of the bonds they had deposited, upon which bonds they were annually collecting interest from the government. They had also made the national bank note credit money only, as pure and simple as ever the old discarded greenback was such money, for all they had added as security to the greenback of old was the individual credit of the private corporation that issued the notes. How little this amounted to in a practical way is evidenced by the well-known fact that no man, wherever located, stops for an instant to inquire by what corporation a national bank note offered him is issued. It is sufficient for all to know that behind each of these notes, wherever or by whomsoever issued, stands the credit of this great nation, pledged for its redemption if the bank issuing it fails to redeem it. 128. DOUBLE PROFIT ON BANK-NOTE ISSUES BY R. W. JONES The government bonds upon which the bank notes are issued are safely deposited in the United States Treasury. The bankers draw coin interest on these bonds from the Government and pay no taxes upon them. The Government allows them to issue about 90 per cent of the amount of their bonds in notes, thus without any cost to the banks except the tax on their issues increasing their interestbearing capital 90 per cent. In other words, upon a capital of $100,000,000 they can reap profits from $190,000,000. They lend at from 8 to 12 per cent interest. The people pay them on their bonds from 5 to 6 per cent interest. Thus the people pay from 13 to 18 per cent interest to the national banks on every dollar of "Blackbacks" in circulation. Besides this the Government coins and issues to the banks their notes free of charge. The Government must also settle up the business of every broken bank. This is a useless and extravagant system, calculated to concentrate wealth and rapidly enrich the money power of the country at the expense and by the oppression of the people. 129. ANALYSIS OF PROFIT ON BANK-NOTE CIRCULATION It has been assumed by those not fully informed on the subject that the issue of national bank circulation is attended by a large profit; that is, that the banks receive the fixed interest on the bonds deposited as security for circulation and current rates of interest on the total amount of notes received, making their net profit the sum of these two returns. The fact, however, that the volume of circulation outstanding is approximately only 70 per cent of the maximum issuable—that is, an amount equal to the paid-in capital stock of the banks is evidence that the circulation franchise is not as profitable as would appear. Below is given a computation made by the Actuary of the Treasury Department of the profit on circulation, based upon the deposit of $100,000 of the various classes of bonds available at the average net 2 Adapted from Money is Power, pp. 44-45. (Davis & Freegard, 1878.) Adapted from Report of Comptroller of the Currency, 1911, p. 12. |