cent. tax on state bank notes. This proposal is not widely or seriously considered and would probably be exceedingly inadvisable at this time. The country will not willingly give up the advantages of safety and uniformity which we have enjoyed under the present system and which probably have a better chance of being continued if the business of note issue continues to remain under national supervision.

The inadequacy of our currency system has been realized for a long time. Plans for reform began to take active shape ten years ago. Before that time attention had been directed almost exclusively to the more serious and pressing problems connected with the government credit money and the silver coinage. After the election of 1896 the defects in our bank note system began to receive more attention, and reforms were proposed in connection with various schemes for reforming the monetary system as a whole. Interest in the subject was kept alive until the election of 1900 seemed to have definitely settled the free silver agitation, and the currency act of 1900 made changes which more firmly established the gold standard, provided for the retirement of the treasury notes of 1890, and diminished the danger from the United States notes. The currency act of 1900 did nothing to remedy the defects of our bank note system. Its only provisions on this subject were drawn with a view to making the issue of bank notes easier and more profitable, with the result of greatly increasing the volume of bank notes in permanent circulation,1 but in no way contributing toward elasticity. Imperfect as the act was, however, it was sufficient to put a stop to the active agitation of the money question, an agitation of which the business interests of the country and the people in general were becoming thoroughly tired. The great and unbroken prosperity which the country has been enjoying since that time has also caused people to be willing to let well enough alone and not risk any danger to prosperity through changes in the currency laws.

Within the last year and a half, however, there has been evident a growing feeling that our inelastic currency system contains the possibility of disaster to the business interests of the country. As a result, public interest is once more aroused. And to-day,

1 See above, p. 62.

with other monetary problems out of the way (temporarily at least), attention has been concentrated upon the subject of bank currency. A number of proposals have appeared, among which two deserve special consideration. The first is the plan of the special committee of the New York State Chamber of Commerce, adopted by that body in October, 1906. The other was suggested in November in the report of the commission appointed by the American Bankers' Association at its annual convention in October.

The latter plan was made the basis of the Fowler bill (H. R. 23,017, Fifty-ninth Congress, second session) which was favorably reported by Committee but failed of passage in the House of Representatives last winter. The essential features of this plan are as follows:

(1) Any national bank, having been in business not less than one year and having a surplus of at least 20% of its capital, to be allowed to issue "National Bank Guaranteed Credit Notes,' without security, to the amount of 40% of its bond-secured circulation, but not exceeding 25% of its capital. These credit notes to be taxed at the rate of 3%. Provided that "if at any time in the future the present proportion of the total outstanding unmatured United States bonds to the total capitalization of all national banking associations in active operation shall diminish, then the authorized issue of national bank guaranteed credit notes shall be increased to a correspondingly greater percentage of the bond-secured notes."

(2) A further issue of credit notes not exceeding 12% of the bank's capital and paying a tax of 5% to be allowed.

(3) The total circulation of any bank, in both kinds of notes, not to exceed its capital. (Thus, to have the greatest possible amount of credit notes, a bank would have to have 62% of its capital in bond-secured notes, 25% in credit-notes taxed 3%, and 122% in credit notes taxed 5%.)

(4) The same "lawful money" reserve required for credit notes as for deposits.

(5) The proceeds of the tax on credit notes to constitute a guarantee fund to be held by the United States Treasury and used

in paying immediately the notes of failed banks. The Treasury thereupon to become a creditor of the failed bank and recover pro rata with other creditors from the bank's assets.

(6) Adequate facilities for daily current redemption of credit notes to be provided, under the direction of the Comptroller of the Currency.

(7) Any bank to be allowed to replace any of its bond-secured notes in excess of 62% of its capital with credit notes, without regard to the present limit of $3,000,000 a month to the retirement of national bank notes.

This bill differs in only a few essential points from the plan of the New York Chamber of Commerce Committee. The latter plan proposes to allow any bank whose bond-secured circulation amounts to 50% of its capital to issue credit notes equal to 35% of its capital, subject to a graduated tax varying from 2% to 6% according to the amount of credit notes. It also calls for the repeal of the $3,000,000 limit to the retirement of bank notes, and adds the important provision that future issues of United States bonds shall not be available as a basis for the issue of national bank notes.

Obviously neither of these plans presents a perfect system. Immediate perfection is unattainable. But they propose a step in the right direction. The details of the House bill especially have been very carefully worked out to fit present conditions. The enactment of such a bill would give a large measure of elasticity to the currency without seriously affecting the market value of government bonds. Above all it would pave the way for future reforms which might eventually bring us to the complete abandonment of the bond-secured notes, until which time any system should be regarded as only a temporary makeshift on the road toward the ideal system. This feature would be greatly strengthened by incorporating into the bill the recommendation of the New York Chamber of Commerce Committee that future issues of bonds be not available for bank note security. In view of probable large additions to our national debt this provision is exceedingly important and moreover emphasizes the need of settling the currency problem at once, before the situation is made

still more dangerous and the problem still more difficult by large additions to the public debt. Such a provision, together with the clause of the bill allowing the ratio of credit notes to bondsecured notes to increase as the ratio of the bonded debt to the capitalization of the national banks diminishes, would cause the gradual and automatic substitution of credit notes for bondsecured notes, till with the final redemption or conversion of the present bonds the old national bank notes would have disappeared. This process would be hastened also by the entering of many state banks into the national banking system, for which the proposed plan offers considerable inducement.

Another proposal of the New York Chamber of Commerce Committee ought to be added to the Fowler bill. This is the repeal of the clause of the present banking law which limits the retirement of national bank notes by deposit of lawful money with the Treasury to $3,000,000 a month. By the passage of the Aldrich bill last March this limit was raised to $9,000,000. There is no reason why this obstruction to elasticity should not be removed entirely.

It may be asked, why put a tax on the credit currency? A common idea is that a tax is necessary to force the retirement of notes when they are no longer needed. This is a vital part of the plans of currency reform, whose purpose is to provide, not an elastic currency for every-day use, but an "emergency currency" to be called out only in times of special stress. In a properly worked-out system there is no necessity for a tax to force retirement of redundant credit notes based on general assets. Neither the Suffolk nor the Canadian systems make use of such an expedient. There is, however, something to be said in favor of the tax in plans for gradual currency reform in this country. In the first place, it furnishes the guarantee fund. Again, so long as we have two kinds of notes issued by the same bank, it tends to prevent a bank taking out just enough bond-secured notes so that it could keep them and the full allowance of credit notes permanently in circulation, having then no power of expansion in time of need. Finally, any scheme of reform must be to a certain degree experimental at first, and the tax, by enforcing

speedy retirement, may be an additional safeguard during the experimental stage when the new system is getting into running order. As part of a permanent system of scientific asset currency a tax on circulation has no place.

Of the sufficiency of the guarantee fund proposed in the Fowler bill there can be no question. The statistics of failures of national banks since the adoption of the system in 1863 show that during this whole time a tax of one-fifth of one per cent. would have paid in full all the notes of the banks that have failed. Under the Suffolk system the losses to note holders amounted to oneeighth of one per cent. of the total circulation. Since the adop'tion of the Canadian system in 1890, the redemption fund held by the Minister of Finance has not once been called on to make good losses to the holders of notes of failed or suspended banks.

Certain questions need to be noticed in conclusion. Whenever it is proposed to alter our time-honored national banking system, the objection is sure to be raised that our present notes are. safe, at any rate, and it is better to put up with all their shortcomings in other respects than to invite a return to the régime of "wild cat" banking which disgraced our financial history before the Civil War. To thoroughly examine this objection would require another essay. Two or three suggestions may be made, however, which should go far toward dispelling the "wild cat" bogie. In the first place, the soundness of the currency furnished by the New England banks for twenty years during this very period shows that "wild cat" banking does not necessarily go hand in hand with asset currency. New England was not troubled with "wild cat" currency during these years. And the bad currency of other parts of the country was, in the main, due to ignorance of banking principles, dishonesty, lack of experience, inefficient government oversight, etc. With our added knowledge and experience and under the inspection and regulation of the national government, there is no reason to fear that the abandonment of bond-security would mean unsafe currency. In the second place, it should not be forgotten that most of the "wild cat" currency of the ante-bellum days was not asset currency at all, but was based on the very system of bond deposit which is the foundation of our present national banking system.