The A more serious financial problem will confront the insular legislature at its next session in the preparation of the budget for the fiscal year beginning July 1, 1902. Revenue from customs duties will be limited to collections upon imports into Porto Rico from foreign countries. With the inevitable drift of Porto Rican trade to the United States revenue from this source will probably not exceed $300,000, and the necessity will arise of providing $150,000 from other sources, unless insular expenditures are to be reduced to that extent. natural solution will be a slight increase in the rate of the property tax, a reasonable extension of the excise taxes and the allotment of so much of the funds of customs collections in the United States as may be required to supply any remaining deficit. For succeeding years a similar financial programme suggests itself. The taxable basis of the island will increase from year to year with careful revision and with economic development, and the yield of the excise taxes will grow with improved administration and increased consumption. On the other hand, the organization of local government, resulting in the conversion of helpless and inefficient municipal districts into sturdy local bodies, will tend ultimately to relieve the insular government of a large part of its present heavy expenditure for the maintenance of schools and roads. Thus by the increased productivity of existing sources of revenue and by the assumption of what are at present insular services by efficient local agencies, a rational adjustment in insular revenues and expenditures should work itself out. Until this equilibrium is attained every consideration of financial integrity, commercial stability, and economic development demand that the sources of insular revenue now provided should be maintained and courageously extended as circumstances require, and that the appropriated expenditures of the island should be planned not with respect to its limitless needs, but with regard to its definite resources. Every possible effort should be made to increase the revenues derived from sources other than taxation. Land belonging to the insular government should be made immediately available for productive purposes, but in the form of lease rather than alienation. The sagacious legislation of Congress has probably placed Porto Rico in a position with respect to public utilities and franchises more favorable strategically than that enjoyed by any other political community under the American flag. This opportunity has been fully realized by the executive council, and practically every public franchise granted by that body has provided not only for liability to insular and local taxation, but for payment, as a royalty, of a percentage of the gross receipts or a fixed annual rental. This policy, intelligently pursued, will ultimately place the insular treasury in receipt of a large and constantly increasing public revenue without in any degree impairing the desirability of Porto Rico as a favorable field for bona fide investment. No survey of insular finances under the civil government could be complete without at least bare reference to three factors of indirect but of vital concern-currency, banking, and public credit. In regard to the circulating medium of the island, the course of events has been shaped almost entirely by Congressional legislation, and the insular government has had no real responsibility therefor, although exposed to its full effects. The act establishing civil government in Porto Rico provided for the redemption of native currency by that of the United States, and this was effected by officials of the Treasury Department of the United States. Like the hurricane under the military government, the "canje" or exchange has been made to serve as the responsible cause for every subsequent disturbance or ill. It is undoubtedly true that the substitution of a higher for a lower unit of exchange, the brief period within which the exchange took place-even after extended through the intervention of the civil government—and the use in effecting the redemption of gold and notes of large denomination, rather than silver and small notes, worked injury to certain classes. On the other hand, it is proper to remember that an identical currency has fostered commercial intimacy between Porto Rico and the United States, that the period of redemption was a period of disturbance and instability which should, from every consideration, have been made as brief as practicable, and, finally, that it is an unfortunate but apparently inseparable incident of any change in the standard of value that undeserved injury should come to certain classes and unmerited gain should accrue to others. Were the redemption to take place at the present time, it is certain that changes in procedure would be adopted. Whether, with the experience available at the time the exchange was actually effected, a different course might have been pursued is an open question. With respect to banking institutions, the two noteworthy incidents occurring since the establishment of civil government have been: (a) The opinion of the Attorney-General of the United States that, through · the action of Congress, the national banking act is now in force in Porto Rico; (b) the passage by Congress of the joint resolution of June 6, 1900, authorizing and empowering the Banco Espanol de Puerto Rico to amend its by-laws. Preliminary application was made by the American Colonial Bank of San Juan for incorporation as a national bank, and favorable action would doubtless have been taken thereon by the Comptroller of the Currency. Subsequently it was feared that the provisions of the national banking act would hamper the operations of the institution, and no further steps were taken. This determination was a source of regret to the insular treasury. Every movement in the direction of correlating the financial institutions of Porto Rico with those of the United States is a movement in the direction of financial stability, and there seems reason for believing that whatever disadvantages might be suffered from the restrictions of the national banking act would be more than counterbalanced by the increased public confidence which would attach in Porto Rico and in the United States to an institution incorporated thereunder. The joint resolution of Congress of June 6, 1900, was held to constitute a recognition, to a greater or less degree, of the privileges enjoyed by the Spanish bank. Certain regulative duties were therein delegated to, or remained vested in, the government of Porto Rico. In so far as these have been exercised in an administrative or advisory capacity by the office of the treasurer, the policy pursued has been to give efficient compliance, but to exercise the greatest caution that nothing be done to extend new privileges or deliberately recognize such as are in reasonable doubt, above all, when the wisdom or propriety of such privileges is questioned. Accordingly, when the approval by the insular government was sought of the election of certain councilors, the opportunity was embraced of securing from the bank a definite statement as to the general policy of the prospective directory, particularly as affecting any future note issue. Similarly, a request made in October last, that the insular government should approve an amendment of the by-laws of the bank by virtue of which notes of a minimum denominative value of $1 might be issued, was refused as unwise and likely to result in dangerous consequences. The status of the Spanish Bank constitutes an element in the financial situation of Porto Rico that may not be neglected. Under its original charter the bank was authorized to issue notes to three times the amount of its paid-in capital stock, and was required to retain in its vaults specie to the amount of one-third of its total liabilities. The authorized capital stock of the institution is $900,000, which may be increased to $1,200,000. Under the terms of the original charter this would permit a note issue of $2,700,000, possible of increase hereafter to $3,600,000. Whether the joint resolution of Congress of June 6, 1900, constituted a definite authorization of such extraordinary powers of note issue is a matter that will probably in the end require some judicial determination. Up to the present time the bank has not been able to place in circulation any alarming number of notes. The amount emitted up to March 31, 1901, was $966,882, and the amount actually in circulation at that time was $546,436; but the possibility of large issue at any time in the future can not be regarded other than as a standing menace to the financial security of the island. Taught by bitter experience, intelligent sentiment in the United States recognizes the danger of an unsecured note issue, and a national-bank note is the only type of credit currency that is tolerated. No sane mind there would propose to vest in a private agency power to issue notes to an amount equal to the total circulation of the country and enjoying no preference over other liabilities of the bank with respect to the security given by a metallic reserve of one-third. Yet this is precisely the relation of the Spanish Bank to the island of Porto Rico. At no small cost to its people, the currency of Porto Rico was unified with that of the United States, and opportunity thus afforded for the natural laws of trade and exchange to supply the monetary needs of the island. It can never have been contemplated that opportunity should thereafter have been given for a private institution to issue, even under local regulation, a form of credit currency in such amounts and at such time as its wisdom determined, but capable of exceeding in the aggregate the total currency in circulation in the island-above all, when the notes so issued were secured by no segregated metallic reserve, were given no preference over the ordinary liabilities of the institution, enjoyed no circulation outside of Porto Rico, and were not received by the Federal offices-the custom-house and post-officein Porto Rico. The affairs of the bank may have been conducted in the past with sagacity and conservatism; the same principles may control its present administration, but no responsible stewardship for the financial stability of the island can regard with anything other than apprehension the possibilities of the future. The situation seems to warrant in the fullest degree a cordial indorsement of the recommendation of the honorable Comptroller of the Currency to the second session of the Fifty-sixth Congress of the United States, under date of December 3, 1900, that the supervision in the interests and protection of the public of such native banking institutions as were in existence upon our accession to sovereignty of Porto Rico and Hawaii is "a subject of great and immediate concern, and should have the prompt attention of Congress." The most favorable element in the financial condition of Porto Rico upon the establishment of civil government on May 1, 1900, was the absence of any funded or floating insular indebtedness. The island still remains in this advantageous situation. The unexpended portion of the large sum of money made available in the "two million refunding act" by the generous act of Congress, for allotment by the President of the United States, for the benefit of the people of Porto Rico, has been treated as a fund available for capital expenditure, and the same policy will doubtless prevail in the future. In December, 1900, an allotment of $200,000 was made for the construction and equipment of school buildings, and in March, 1901, a further allotment of $200,000 was made for the construction of country roads. The amount still unallotted and available on March 31, 1901, was $795,736, and this fund will doubtless be similarly allotted, from time to time, to defray the cost of insular improvements not properly chargeable to current revenues. In the course of the next few years the occasion will undoubtedly arise for important capital expenditures in Porto Rico. Public institutions must be provided, a Government building must be erected, more schoolhouses must be built, and the work of road construction must be continued. The advantages derived from these and similar works will be enjoyed by generations to come, and it is proper that the burden thereof should not be borne exclusively by the taxpayers of this generation. The act of Congress establishing civil government provided for this contingency in authorizing the insular government to issue bonds and other obligations to an amount not in excess of 7 per cent of the aggregate tax valuation of its property. While thus vested with ample power to contract an insular loan, it is a matter of sincere congratulation that the availability of the "customs refund" has made it unnecessary up to the present time to resort thereto in defraying the cost of the two expenditures of this character undertaken by the civil government-school buildings and road construction. For the civil government in the first year of its existence, with a temporary, and later an untried, revenue system, to have attempted to utilize its public credit in the markets of the United States or elsewhere would have been premature and unwise. When the financial stability of the island has become an accomplished fact, and its revenue policy has won recognition in the financial centers of the world for soundness and conservatism, then, and not before, will the use of insular credit in moderate amount and for legitimate purposes represent wise financial administration in Porto Rico. If the issue of a public loan in Porto Rico for admittedly desirable purposes be deemed at the present time unwise, certainly a much stronger expression is appropriate with respect to the proposal to issue an insular loan of a minimum amount of $3,000,000 in aid of depressed sections of the agricultural interests of the island. This plan was urged immediately upon the organization of civil government. A bill embodying it passed the house of delegates unanimously, and received the affirmative vote of every Porto Rican member of the executive council at the last legislative session, and the scheme has since then been periodically revived and persistently urged upon the insular administration. To the conservative sentiment of the United States a proposal of this character smacks so hopelessly of economic fallacy and takes rank so instantly with the wild-cat panaceas and populistic cure-alls of recent political agitation that detailed arguments in opposition will be received with a certain impatience. The United States has felt the sting of State "land banks" and credit institutions too keenly. Its people have witnessed the course of economic reconstruction of large areas too often to believe that the proposal that the island of Porto Rico should contract a burdensome loan and employ the proceeds in advances, in varying amounts, to the relief of distressed agriculturists, would result otherwise than in speedy disaster. Porto Rico is undergoing the same economic revolution and industrial development which the Southern and Western sections of the United States have experienced. In this transition scarcity of capital, stringency of currency, and necessity of liquidation are painful incidents. But the wisdom of men and the experience of communities have devised no short cut, and the path which popular sentiment |