and this, where there are clearing-houses, takes place through them, and elsewhere by exchanges between individual banks-in which latter case balances are settled sometimes by Dominion notes, but ordinarily by draft upon the head office. It appears from the best evidence obtainable that, on the average, the life of the notes of a Canadian bank is not far from thirty days. In other words, the entire circulation is, on an average, redeemed twelve times over in the course of a year. The most interesting feature of the banking experience of New England was the system of bank-note redemption which was there developed the Suffolk Bank system-taking its name from the bank which acted as the redeeming agent. Prior to the inauguration of the system, in 1824, the notes of banks situated at some distance from Boston were received only at a discount by the Boston banks. This was usually only sufficient to cover the expense involved in sending the notes home for redemption, and in later years it rarely exceeded one-half of 1 per cent for the bills of Massachusetts banks. This discount, however, although slight, allowed the bills of the country banks to circulate in Boston to the exclusion of those of the Boston banks, which, being redeemable on the spot, remained at par. So long as the issuing country banks were known to be solvent, their notes passed readily from hand to hand in ordinary business transactions, although at the banks they were not accepted at par. Persons having payment to make at a Boston bank, therefore, found it advisable to lay aside for that purpose any notes of Boston banks which might come into their hands, as such notes and specie were the only forms of currency accepted at par by the banks. The outside notes, however, which were readily accepted in business, were paid out again by the merchants, and thus kept in circulation. The consequence was that the field of circulation, even in Boston, was monopolized by the notes of outside banks, on the principle that the cheaper money drives out the dearer. It was to remedy this state of affairs, by insisting upon the maintenance of all the currency at par, that the Suffolk Bank system was inaugurated. The general arrangement made between the Suffolk Bank and the other banks of New England, which were soon drawn into the system, was as follows: Each bank placed with the Suffolk a permanent deposit of $2,000 and upward without interest-the amount depending upon the capital and business of the bank. In consideration of this deposit, the Suffolk Bank redeemed all the bills of that bank which might come to it from any source, charging the redeemed bills to the issuing bank once a week, or whenever they amounted to a certain fixed sum, provided that the bank kept a sufficient amount of funds to its credit, independent of the permanent deposit, to redeem all of its bills which should come into the possession of the Suffolk Bank. It was further agreed that the Suffolk Bank should receive from any of the New England banks which kept an account with it the bills of any other New England bank in good standing, placing them to the credit of the bank sending them on the day following their receipt. When any bank refused to join the Suffolk Bank system, the Suffolk Bank merely presented its notes for payment in specie at its counter. In such cases notes of other banks would not be accepted in redemption. This practice united practically all the banks of New England, and in a large measure insured the prompt redemption of their notes at par at all times in Boston. Inasmuch as this city was the center of the commercial interests of New England and because Boston funds were at par elsewhere, a note which could be used at par in remittances to Boston was never depreciated in any part of New England. At first there was much hostility to the system on the part of some of the banks. They objected strenuously to the necessity imposed on them of making arrangements for the redemption of their notes at Boston, and occasionally a bank seceded from the system in the hope of getting an increased circulation. In such cases, however, it at once appeared that its circulation was then limited to the immediate vicinity of the place of issue, and the inconvenience and loss of confidence resulting led to a renewal of the agreement. In general, it was the practice of each bank to gather together the bills of all the other banks paid over its counter and include them in its weekly remittance of its own bills. In this way there was very little necessity for redemption in specie, the Suffolk Bank merely acting as a clearinghouse where the notes of one bank were offset against those of the others. (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, 1 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. |