CIHM Microfiche Series (Monographs) ICMH Collection de microfiches (monographies) Canadliin In-^tituto for Historical Microreproductions / Instltut catitTdie ^e nucromproductionj historiquos 1QQQ I Technica' and Bibliographic Notes / Notes techniques et bibliographiques The Institute has atte-nptea io obtain the best original copy available for fi' may be bibliography. the images in tht^ ignificantly chan; - checked below. rp^!!jres of this copy which ., unique, '.vhich may alter any of iP iductii.-n, or which may :',e u':i al method of filming are n n n Coloured covers / Couverture de couleur Covers damaged / Couverture endommagee Covers restored and/or laminated / Couverture restauree et/ou pelliculee Cover title missing / Le titre de couverture manq,j? Coloured maps / Cartes geographiques en couleur Coloured ink (i.e. other than blue or black) / Encre de couleur (i.e. autre que bieue ou noire) Coloured plates and'or illustrations / Planches et/ou illustrations en couleur Bound with other material / Relie avec d'autres documents Only edition available / Seule edition disponib'e Tight binding may cause shadows or distortion along interior margin / La reliure serree peut causer de I'ombre ou ce la distorsion le long de la marge interieure. Blank leaves added during restorations may appear within the text. Whenever possible, these have been omitted from filming / II se peut que certaines pages blanches ajoufees lors d'une restauration apparaissent dans le texte, mais, lorsque cela etait possible, ces pages n'ont pas ete filmees. L'Institut a microfilma le meilleur exemplaire qu'il lui a ete possible de se procurer. Les details de cet exem- plaire qui sont peut-etre uniques du pc nt de vue bibli- ographique, qui peuvent modifier une image reproduite, ou qui peuvent exiger une modification dans la metho- de normale de filmage sont indiques ci-dessous. Coloured pages / Pages de couleur j I Pages damaged/ Pages endommagees □ Pages restored and/or laminated / Pages restaurees et/ou pelliculees Pages discoloured, stained or foxed / Pages decolorees, tachetees ou piquees Pages detached / Pages detachees |y I Showthrough / Transparence □ C"ality of print varies / Qua D D Quaiite megale de I'impression Includes supplementary material / Comprend du materiel supplementaire Pages wholly or partially obscured by errata slips, 'issues, etc., have been refilmed to ensure the best possible image / Les pages totalement ou partiellement obscurcies par un feuillet d'errata, une pelure, etc., ont ete filmees a nouveau de fagon a obtenir la meilleure irnage possible. Opposing pages wiih varying colouration or discolourations are filmed twice to ensure the best possible im.age / Les pages s'opposant ayant des colorations variables ou des decolorations sont filmees deux fois afin d'obtemr la meilleure image possible. Additional comments / Commentaires supplementaires: Vcirious pdgings. This Item is filmed at the ri.'duction ratio checked below / Cp document est tilme au lam dp reduction indique ci-detsous. lOx 14x 18x 22x 26x 30x 12x 16x 20x ?4x 28x 32x The COPY filmed here has been reproduced thanks to the generosity of: L'exemplaire film6 'it reproduit grace i la gdn^rosit^ de: National Library of Canada Bibliotheque nationale du Canada The images appearing here are the best quality possible considering the condition and legibility of the original copy and in keeping with the filming contract specifications. Les images suivantes ont 6t* reproduites avec le plus grand soin. compte tenu de la condition et de la nertet6 de rexemplaire film6, et en conformity avec les conditions du contrat de filmage Original copies in printed paper covers are filmed beginning with the front cover and ending on the last page with a printed or illustrated impres- sion, or the back cover when appropriate. All other original copies are filmed beginning on the first page with a printed or illustrated impres- sion, and ending on the last page with a printed or illustrated impression. Les oxemplaires originaux dont la couverture en papier est I.TiprimAe sont film^s er commencant par le premier plat et en terminant soit par la derniir ' page qu' comaorte une empreinte d'impr'jssion ou d'ilL ' .ration, soit par le second plat, semn le cas. Tous les autres exemplaires originaux sont filmAs on commencant par la premiere page qui comporte une empremte a'impression ou d'illustration et en terminant par la derni^re page qui comporte uie teile empreinte. The last recorded frame on each microfiche shall contain the symbol * (meaning "CON- TINUED"), or the symbol V (meaning "END"), whichever applies. Un des symboles suivants apparaitra sur la derniAre image de cheque microfiche, selon le cas: le symbole — ♦• signifie "A SUIVRE , le symbole V signifie "FIN". Maps, plates, charts, etc., may be filmed at different reduction ratios. Those too large to be entirely included in one exposure are filmed beginning in the upper left hand corner, left to right and top to bottom, as many frames as required. The following diagrams illustrate the method. Les cartes, planches, tableaux, etc , peuvent etre film*s i des taux de reduction diff^rents. Lorsque le document est trop grand pour etre reproduit en un seul clich6, il est film6 ^ pariir de Tangle sup^rieur gauche, de gauche i droite. et de haul en bas. en prenant le nomb^e d'images n^cessaire. Les diagrammes suivants illustrent la mithode. 1 2 3 MICROCOPY RESOLUTION TEST CHART ANSI and ISO TEST CHART No 2 1.0 I.I Hi |2.8 II 2.5 12.2 2.0 1.8 1.25 1.4 1.6 ^ A PPLIED irvHGE Ir _ _^ .nestef. NcN Tork U609 uSA ' 6) +82 - 0300 - Pnon« =!^= 61 288 ~ %9aa - Ft$' Modern Business CANADIAN EDITION A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN ACCOUNTS, FINANCE AND MANAGEMENT KDITHD 15 Y JOSEPH FRENCH JOHNSON PFAN. sr.w voHK r,Mvi:,iMrY s, ii u.,, ,,r , ,,„mkfue, accoi'sts and finaste WVIAKD KCoNdMH S "I{(;amzati!).\ amj .\l\na(.i:.mi:x SKLLIXC cui'Dns IliAFIIC ! \i)\ i:h'iisin<; HI SIM;sS (()Iil!];si'( ixdiate T Lkk ( iM.i.dWAr H. S. BlTLKIt LkK CiAI.LOWAT S. .1. M( Lean- Lkk (i allow at (ir(;n 1 rni;i) W. FiKi.i) f Kahl Df.an HowAno I \\ W Sw AVSOS K. L. Stf-.waht Pattkrsun f FUANKl.IN I':S( UKR I I. I. StKW AKT i'ATTKKSON 'I"Hil\I \^ ( 'ONW VV l.W Ksr.MKN T AM) SI'KC rLAllOX \i iu.ht AT«n.,i) A<(orxTiX(; pii vcTKi-: coiu'diiAriox riN \x(i; MOXKV AX I) HANKlXd HANKIXC, 1M{ \( IK i: . roiuiKix i;x< iiAX(;i; . .1 iithor Jamks .Ma\or IXSLRAXCE . . . . UK.W. I>TATK . . . AFDnixc; COST FIVDINC . . . rOMMi;i!( I \I, ].\W l FiiKh W. 1 iKi.i) ri:i)\vAKi> H. JlAnnr I Fhki) W , I"ir,i.i) i'Wai.tiu Li\i>\F,re ■ ■ ■ \ K W WiuMir SllYMorii \\ ALTON . . DkNTI Ii S KlMHALL \\'\LTi:n S, ,'on\.^o\ I f s «4^ Money and Banking A DISCUSSION OF THE PRINCIPLES OF MONEY AND CREDIT. WITH DESCRIPTIONS OF THE WORLD'S LEADING BANKING SYSTEMS BY EARL DEAN HOWARD PROFESSOR OF FINANCE IN NORTHWESTERN UNIVERSITY SCHOOL OF COMMERCE; AUTHOR OF "INDUSTRIAL PROG- RESS OF GERMANY" IN COLLABORATION WITH JOSEPH FRENCH JOHNSON DEAN OF NEW YORK UNIVERSITY SCHOOL OF COMMERCE ACCOUNTS AND FINANCE: AUTHOR OF "MONEY AND CURRENCY." "THE CANADIAN BANKING SYSTEM." ETC. REVISED BY W. W. SWANSON ASSOCIATE PROFESSOR OF POLITICAL SCIENCE IN QUEENS UNIVERSIT^- Modern Business Canadian Edition Volume VII ALEXANDER HAMILTON INSTITLTE NEW YORK C'OPTRICHT, 191 I. BY ALKXAXDKU HAMILTON IXSTITITE ('0PVliIi:HT, lOl:;, BY ALKXAXUKK HAMILTON- INSTITfTE CopyiiiiaiT, lUi:i, BV ALKXANDKU HAMILTON INSTITUTE CripVliMIlT, 1911, BV ALEXANDKI; HAMILTON IN.STITL'TE COPYKIGIIT IN GkE^T HriTaIN, 1 •) 14 BT ALKXANUEH HAMILTON INSTITUTE EDITOR'S PREFACE This volume (liscusses questions in which the iVmerican peo])le have heen I'oreed hy events to take a deep and personal interest. The rise cf prices and resultant in- crease in the cost of living since 181)7 have ])rovoked uni- versal discussion and even called forth proclamations of disapproval from mayors, governors and other j)ublic men. Canada lias succeeded in avoiding many of the monetary evils common to other countries. The panic of 1907, while it affected Canada, was due to causes prevail- ing in the Ignited States. Similarly the tight money situation in 191.3 was caused hy conditions south of the border. The discussion of both Canadian and United States money ])roblems will, therefore, be of special in- terest to business men in Canada. It goes without saying that no man is fit to plan the digghig of a tunnel or the construction of a railroad, to mend a clock or repair an automobile, unless he has had a certain amount of scientific trainiiig. In mechanics the world recognizes the need and ])ractical value of science. l!i finance the same need exists, but it is not yet generally acknowledged. E\erybody thinks he un- derstands the money (juestion, or that it is not worth understanding, and the average man is inclined to think that the business of banking is so simple that if our banks have in any way fallen short of their duty, the men M'ho manage them must either be very ignorant of their business or very selfish and sjieculative in their methods. As a matter of fact, the science of monev and credit. KDITolfS I'KKFACK wl.ilc almost as exact in its nature as niathematiis is one ,>| the most difJicult in the AvhoJe fieUl of economies, and the h.isiness or profession of hanking-, wliich is founded ujx.n llmt science and should be conducted in aceonhmce with its principles, is one demanding the keenest and clearest hrain. Industry furnishes the red blood of the economic organism. Trade and commerce are its cn-culatory system. Finance is its nervo.is sys- tem. If the banker is incompetent and fails in the p'.r- formance of his task, the entire business world is pai-a- lyzed. In the present volume the effort has been made to .yivethe reader in the clearest possible lan<,niage a scien- tiHc knowledge of money and cre(!it and an accurate description and analysis of the various banking systems with which the world is now having experience. Tlie subject is difficult and no reader can expect to get en- lightenment from this book unless he is willin." to think as he reads. If he will d(. that, I feel certain that he wdl quickly grasp all the principles expounded and in the end discover that many business prol)lems whieii have perplexed him have been made easy of solution. The editor cannot too strongly advise" that this volume be read carefully by the general business man. The hanker, of course, should understand the subject. If lie does not, he is conducting his business by rule of thumb, and is courting disaster. But the business man should not think that Money and Banking are matters with which he is not concerned. On the contrary, they treat of matters which immediately concern him! The relation of money to the upward and downward swings of prices is something which the average Inisiness man does not percei^•e, yet it is something which he ought to understand, for his prosperity often depends on causes EDITOR'S I'HKFACE affecting' merely the (kniaiid lor and supply of money. The j)riee.s of commodities are merely an expression of the value of money and tliey change whenever money ehan^es. The business man who Unows on* i-e con- ditions which govern the value of the commoiiiiv which he handles is only half protected against loss. 1 1' h. would he safe he must know also the conditions which determine the value of money. Joseph Frexch Johnsons New York University. TABLE OF CONTENTS PART I: .AIOXEY. SECTION 1. O 3. 4. '). 6. r* I • 8. 9. 10. 11. rilAI'TFH I. FUXDAMHNIAI. EC OVUM iC" CONCEPTS. PACE Reasons for tlic Study of Moiuy ,iii(i Hmkiiig ... l Warnings of the l.aU; Panic 3 Sciiiicf 3 linance g 'I'l clinology and HuNimss 4 BiisiiKss tlif Hisult of .S|)((iili/,,iii,,ii ,if L:il),)r . , 5 I'rodiu'tion 5 Production by C'ii.ingc ot Dwm rslii]) (j 'I'ardy Id cognition ot' \'aluc of Exchange .... 7 Pri\atc Property g Property and WValtli g Integration of Industry 10 (HAPriH (I. EXt 11 ANUE. 1.'^. Beginning of l!\cliaiigc 1 1. Barter l."i. .Money 1(1. .Money l{ej)resents Ini'oniplete Kxcliangi s 17. Credit IS. ( redits as Media of I".\cli.inge . I!>. .Money and Credit Hepresentatives of \\( a 'JO. Classification of Wi dtli -1. l'.ntrepren( ur .System ■J-J. Capital '23. Capitalization 11 12 12 \3 I I \r, 17 18 1!) •JO 21 VII Vlll MUXKV AND BA.NKJNG '-H. D.inaiid for Capital CnniU -."'. .Mumy IiK'omts .... ■-'()'. .Mithods ot' Iin,stii),iit -7. Rtal Invfstiiiciit . CIIAI'TKH 111. N'.vi.ri:. '■is. Valii,' a R,.. .Maruiiial I'tijity .... •i<). .MarMi„,.,I l-uUiy („ i|„. hulixid: ti7. H.conciliatioii of tin- two Tlirori, s PAGK •■it 28 29 '■-'.') '-'!» .•il til 32 3:i 3t CHAl'TI.H l\-. KVOI.ITIOV OF Till-; MKDIL-.M iH- EXCII A NCR •is. I'riniili\f Ideas of \'alsi.- ■i!». ()rnani.„lai .^ton,-. Karly IMd as Mi,,;,',. t". 'I'lirrr I'linctions of j'rnintn.' M,i„ry H. W aiiipiiiii 12. H.avr:- Skins t;i. A|,n-ii idtural i'rodiicts as Mon.y a. 'I'oliacco .... i'>- Summary of I'rinciplrs Id. Divisiliility 17. I nifiirmity l-'^- ( oj^iii/aliility Mi. .>^t.diilit\ of \-altir . fir> ■ . at) . . 'Mi . . 36 . . .'i7 . . 38 . . 38 . 40 . 41 n 42 42 '■ 11 \ I' it I; \ . KVOIt Tiov ,„ ,■,,,.. sTWDMd, OF VAFl F r>0. M.lal Slandard-, thr I iii,.( i,, .w,,,,;,,. :'>\ (iooij (^11 diti, s , . . I I C'ON'l'KN'JS IX PAGE 45 46 46" . 48 . 49 . .^0 . 51 . 52 SFXTION .'>2. Platinum I'liMicrrssfiil ,is Mdiuv .'5;). Oiijictioiis to (iold ,111(1 Sil\(r :"> K Coiii/ifTi' .").■). Nanus of ('dins .■)(). Hrtiuircnu nts df (khhI Coinage 4- 57. Standard of \'alnr T'S. Donl,],. Stan. lard I'ossil.lc l-ntil Last (cntiiry .'lU. ( in sliani s Law (il>. .Mi.stak< s of I'.arly I.rgislalors ()1. K\j)( rirnr,. of Knjrj.ipd uiH, I),mi!iI( Stand.inl <)''^'. Adoption of Singlr (,old Standard I innt, ntional . . 53 6:i. .Mintage ,, Cn. I.tgal T. iid. r 52 6r>. Historv ot' ( fiinagc in tlic Cnitrd States .... 5() (i(i. First Ratio ot' Sil\ \ VM (-.NTS. 7L n.'f'.cts of (,,,],] 75. I)' linition of Drfrrnd Pavnieiils 76. I'fl'eet of legal i'l nder I aus ...... 77. Coristitulion alily of I ecr.ij 'i'mdc r \ets 78. Delitor ( l.iss Injiind l>\ .111 .\ppreeiatiMg St.uidird ()t 6.-. (it) (if) (18 CIIAPTIR \If. srrn.v wr) di.mwm i\ lii.i, \ iiov to movky. so. Prires D. p. nd Cpnii ||i, ^tone\ Matk.t XL I't!!!!' of \!f.!:: I 8'.'. Distinction IMudu 1), Mn .iiid D.niand fif) 711 7i 71 MONEY AM) BANKING S.^. Tiirrr \';)rj( ties rif Money '"^K I'iat \. Cr.'dit Momv >^'>- Di'iiiaiKl (or .Muiicv Aiialvzcd Sf). Hapiifity of ( irciil.itioii X7. Krt'rct of I'opiil.ltioii ■■^N. V.tl'ivi of DiMsioil of l.;il,o|- S.M. Sjiccial Dciiiaiul for (,,il,l !"l. I'ayiiiiiit of ('ontracts 7. (io\ernni(nt Iloardino' .'»N. Diseriininatioii in Demand for Money !»<>. Seasonal Demand for Money HID. Demand tor M.m.y in International Trade nil. I'remiinn on Crold ll'-;. Lneertainty of tlie Demand for Money ill.'!. Snpply of Moi:ev I'U. X'arielies of Tnitid States Mn?iev 11'.". Siipply of (,,,l,i " _ l"(i. I'.ietors in tl,e Snpply of C.old g.j i"7. I'ecnliarity of tiie Snpply of i.old !"''<■ Ul^torrell Illustrations I"!'. ■|''iiip..rary Hesnits of ( jianp ,.f Mom y Supply . ll'». ''I" i of Increased Supply of (, old Traerd Out . '"• ' il"'l '" 111' I'fice-Haisinf; Klfeet of (,o!d I I'-'. .\lt, rnali\e [Ms ,,( .\ , w (iold I I.!. Widespread l.lleel of' \, w (,old 1 I I. ( nn.p.irison of Kileet of Incr. is, of Supply ol (.old and I' a])' r Mom y II.-.. ilo« Mueli Momy is Needed m a loiintry.* Ilti. I'nee ( hantr>s not Sviielironons 117. Stiiiml.itin^- Kdret of Hisini: I'ru-i s I I H. He.ielioii I l<>. .Svvlnirv ,,«' I>>; TACt. 7'-:' 7:i I .'' 71 7."i 7.'' 7."> 7t) 7fi . 7S . 7S • 7.<> . 80 . 80 . 81 . 81 . 82 8'J 8,'{ 8i 81. 8j 86 87 87 88 I'-'O. C'linuilativ, Ktle.t of i:(()noinie Torres 8.0 91 !)1 V^ CONTENTS XI cHArri.i} \iii. '1 II KOI! V OF I'HICES. 1-21. \2-2. 12; J. 12 K 1-2'). 126. 127. 128. 1 29. l.SO. ISl. 132. ! -.i'.h LSI. 135. " Slinrt " Sales of Moiiry . " Squcezi!if; tlic Shorts "... Forced Selling Peo|;le Heeoniing Better I'xliicatcd Ciriier;il Price Level .... Price 'r.iMes M'lny ( oniiTioditie.s Kxampie of I'riee T.ililc . " W'eiglitiiig " of Price Tables . Advaiit.ifies of Weiglitiiig . Falkiier Price j'ahli' .... High Prices During the Cnil War I'oreigii Price Tallies .... Kcmiomic I'orces to he Observed . Saving and In\csting .... CHAPTER IX. DOMESTIC AM) rOKF.IC.N KXCH ANC.R. 136. Relation 15et\M(ti i'ori ign .-iiid Doniestic I'xch ing I.S7. Paniients 1)\- Means of Credit Balances . 138. rnnction of the liatik in Making Paymciils 1.3f). Payments at a Distance IK). Exch.'nge on New ^ Ork IH. How the H.inks Handle New York I'xchangi 1 PJ. Setthinenl of .\ccoiints J^etween H.-nks . 1 t-.T. Cost of Ciirreiicy Shipments .... IH-. Settlements 'I'hrongh the .*^ul)-tre isnries . 1 I,'). Rate ot' Ni \v ^ Ork Kxchange .... 1 16. .'^ignificanee of Rates o'' Domestic ]-,\eh,ingi 147. The ( ieiring House Principle 118. Settlmu; llilanees hv Cse of ( r.dit . 1 If), (iold the Internal Min.'il Medium !,")(). |-'iinction of tlx' Dealer in F'onign I'.xclianui \!t\, }■' \ ■ininlc of I''2. Mortgages and Bonds 196 -2:>:i. Example of Timber Industry 196 -231. Advantages of Timber Bonds 198 23'). Interest Rates on Bonds 198 236. Long-tinu; Borrowing 199 237. Credit Economizes the Use of Gold 199 2.'i>S. Li(iuidation of Credit 200 239. Conunercial Paper Houses and the Credit Situation . . 201 2K). Use of Credit as a Medium of Exchange 202 2H. Bank Credit 202 ti2. 1)( posit Credit 203 'J 13. I'.lastieity of Dejiosit Credit 20t 2 11. (Jold Jie Basis for all Credit 205 'JLV Reserve 207 2 Ki. Eff- ct of Reserve Requirements 207 2 17. Danger of Use of Credit in Panics 208 218. Importance of Credit 209 CHAPTER XIII. EFFF:( T OF (UFOIT ON' PRICES. Q.tO rn/.r.-iKinrr Vi./I .-,( \fiir.. FitiiMciit \fnlifv , . , .211 250. EfTect of N on-i ireu lat inff dit 2T1 I 251. C: •11. • if Credit 21; I { ONTKNIS x\ How I.rss.ii(<] |)riii,ni(l tor Moiiry Caiisrs IJjm' m I'rir. s 'J 1 ;5 KtfVc't of Nilioiial IJ.iuk Xolcs -'■' tlji IJalik Not ts .■111(1 C'liccks Dili'triiitiatrd ■Jl !• l-'.ti'cct of (io\ rn it ' rciiit Moiuv ii,")(). CniiiL 111(1 S|)iciil.it lOIl II ow Spcculatioii Mav 15.- Both Cause and I'.lfcct ol a Ri sf in i'rioi !58. Dt'ffct of our (urritu-y Sysuin ^17 c HA I'll, u xi\'. C.OVKUNMKM' Cli I'.DI f (THUKXCV. 2.")0. Cl.issiticatioii of (io\iriniun t ( r. ( tii-rrli.-v •2()0. I'iat M. Drflllrd i()l. r'actors Dtterniiniiifi the N'.iliic of Crrdit Monry 'iti'J. Risk in Tree I'sc of Credit Money t:6[i. Rcmil.ition of Credit Money , ;l. DcNii to M.aliit.aiii X'.ilue of Credit Money •Jt;.). (ioverniiH lit C ridit not "Ideal Mo-v 2(ry. Diffieiiltie.s of Adjusting Siii>])ly l67. Prejudices Ag.iinst Cio'x 1861 2()8. l"inanein< rnmeii t Cr((lit Monev R tlie Civil W; t2()!). Disadv.ant.ige of (io\ ( riiinent Diht 270. {ioverillliellt Delit 271. Demand Debts a W'eaknes.s l~2. Provisions for Rdirini Debt 2 '20 220 221 !2 1. 22() 226 22 S 229 ( HAPTKU XV. ECONOMIC 1 INCHON OF Till: HAN 27.'1. Produeti - Industries Clissili d 271. IJee.iiii tul.itiou of I'und.iiiient.il Priiieiples Cr< (lit 27(i. H Dealer in Credits Ranks ."^iijiply a Medinni of I'.x eli.antie 278. R.ankiiiii is ;i (Juasi-l'ublie I'unetion 27!). Tlie Hank .a Distributor of C-iiit.al 280. Bankin-i Prineii'lc 231 232 2.S3 2.S3 23:> 23.^ 230 237 XVI .M()M:V AM) r.ANKING SECTION '281. Ddiililc I'liiicticiri ol' ( nimnt rci.il li.iiik.s '28-2. P.ciili.ir I'rivih lie of ISuikt rs . 28a. H.iiiks Do Not Crcitr Capital . '281. Source of Capital and Credit of Hank '■28'). Opirations of ;i Hank i28(). Hesponsiliility of the Hanker for i'ropi r I )i>>tril)ution of '287 '2 1-2 2 i;i 2H. Capital -2l\ CHAI'TKH XVI. ni:r()SiT cckkkncv. of Credit 21S 287. Anal_ '288. How Credit Promotes Iridiislry .... ■28f). Hanks Create Credits "290. Hank Credit {'referable to Cash .... 2<)1. Sliiftinii of JJank Credit \\'ithoiit I.itjuidatioii '2<)2. Similarity of Checks and J5ank Nott s . 2f).S. Limits of Karninj.; 1N)\V( r of the Hank . 291'. Ditference Hetween a Casii atul Cn dit Loan . 29;"). Cash a Precious Commodity at Times . 2!K). Prohlem of the Reser\ e of (ireatcst Importance 297- Lack of Co()|)( ration Causes Hanks to Lose Ilcserv 298. .Methods of Incr() 2.-. 7 257 258 259 259 CH.VPTF.R XVIL BANK ST A ri-.M FAT -- R ESOURCES Coiiiliined Stall iiient .'5(12. Comliined Stati iiient 2()() ,'!().'). Proof' of the D( posit Currency Theory 2()1 'MM. Douhle-Kntry System 21)2 .'i()5. .Mteralions in \' due of Resources 21).'l ;i()(i. Concealed Assets 2(i t .'i07. Loans .and Discounts 2f) t :i(i8. Overdrafts 2^5 .i(>9- I nited States Bonds to Secure Circulation .... 2()() 31U. rnitrd States Honds to Secure I'mtfd Stil,s Dt i)osits 2f)6 CUNTKN'rS Wll SECTION till. L'liilid M.iti > Hdiuis (III H.iml . yi'2. I'n iiiiiim^ oil L iiittd Sl.itis lioiitls . ,'11 ;i. 15(iii(l.s, Sii'iiritit .s. ttf M k Hanking ilimsc I'uniiturf and I'ixtiiri-s ;;:,'). OtlkT lU:i\ Kstatc lldUiiiigs . ;il(). Due I'roni National Hanks .... ;il7. Due I'roiu .Vpiirovrd Hcsirvi' .\j;;'nts ;il8. (lucks and Olhrr Cash I Uiiis ~ - Kxcli C'ltarint;- Houst- :'<][). Hills of OtliLi- Nalional Banks . .S'.iO. Lfgal '!'( lidir Notes ;i'21. Ucd; inptioii I'lind '3'i:i. Due From the rniliil States Treasury mg tor fA8E '^liO 'itjtj -Z61 ^2(J7 ^ti7 iitJS ■269 ^269 269 !i70 ( IIAI'TKK XVIII. HANK S1AT1::.MENT — I.IABII.IT 323. C'a])ital .Stock Paid In . 321. Doiihle I.ialiiiity of Stoekliolders . 3-'.-). Surplus ImuuI 326. L'ndivid.d I'roHts 327. National Hank Notes «. mdiiig . 328. St ite Hank Notes Oiii aiding . 32!K lndi\itlual Deposits .... 330. I'nited States I)e))osits and Deposits Dislnirsing Ottieers .... 331. Honds Horrowiil .332. Notes and Hills Ketliseountt d . 333. Hills I'ayaln.' 331. Certitied Cheek 335. C'asiiit r's Cheeks Or.lstaniling . lES. of Li ted S 271 272 273 itcS 275 276 276 177 278 278 278 ( HAPTKR XIX. OltC. AM/. XTION AND lUSlN KS.S OF THE HANK. 336 National Hanks 337. .Slate Hanks . ,33H. Private Hanks 339. I'lidi rw riting . 280 . 280 . 280 . 281 XVUl MONEY -vM) UANKINC. SECTION 340. 'I'rust C ouip.iiiit s 311. li.iiikiii'i- Dcpartiiiriit .... .'i t'2. Deposits (if Trust (iiinpaiiifs . .'U;i. 'rnist 1)( pirliiit lit 'Ml. I"iii\iiliial Trusts y !-,">. Corpdrati' Trusts ;i Ki. Sa\ iiij^s IJaiiks ;i t7- I'Ik' Orjiaiiizatioii (»!' a IJaiik . .'i 18. Kvolutioii of tlie Bank .... 3\[). .Stocklioldrrs 3:'>0. Directors 351. C'oiisidtr.atioiis (io\ friiinjr C'hoii'f of 3.VJ. Brl;; 29() 29(J 297 -299 300 301 CII.M'TKK XX. nr.po.siis AND DKi'osirous S()7. General Deposits 3f)8. Sjieeial Dejjosits 36'9. Safety Deposit \ lults 370. IiidiieeiiK iits to Depositors .... 371. Dittieulties in Kstaiilisliiiiii- a New Hank ."i (' c. > .iiu< oi .1 ij.tiiiviii:^ V .iriiiei'ii.Mi 37.'". Kiteiiit; Cheeks and Drafts . 37t- .Method of " Kiteiii;:; " SOS 303 301- 3()t 3()() 3 Ob 307 307 CONTENTS MX J I s, 379. 380. 381. 383. 38t. 385. 38(i. 387. 388. 389. 3yo. Ucasoiiabk Title to Dt-pusittd Clit'cks, etc Case of lJi>[)iited Owiursliip to Deposited Check . Accepting Deposits when Insolvent is Criminal . Drawer Released from Responsibility After Time I.oeal Hanks Holder of a Check Cannot Sue Bank . Revocation Insuthcient Funds Forgeries l',)st-Dating 391. 39'-'. 393. 391. 393. 39tJ. 3!)7. 398. 399. 400. 401. 40^2. 40.S. 404. 40r). -l!!!". 407. 408. Set-Ot»" Wlun a Deiuteitor Fails, His Note Not Being Secured Advantage to Depositor . . . • Sel-Olf Makes Failures Appear Worse Illustration Form of Note ( HAFTER XXI. LOANS Ol' THK BANK. Two Qualities :>ecessary to the Making of ii Banker . . In.estmeiit Loans Conditions Cnder Which They Are Good Banking Loans Industri.il Loans Capital Loans Capital Should Come From Stock and Bond Mortgage Loans Loans Reported to the Comptroller Demand Lo.ins Have Increased . Double-Name Paper .... Single-Name and Brokers' Paper . Judgment Note Collateral Note Risk in Collateral Loans . L'sury Laws ('.•ill I.O.'VilS F.X'UOlt' d .... Loans on Open Book .Vci'ounts . i'roN iding Tt niporary Capital 308 308 309 309 310 310 310 311 311 311 312 312 312 313 , 813 . 313 ssues 315 315 316 316 318 318 319 320 321 321 321 323 323 324 325 826 327 327 XX MO\i:V AM) HANKING SECTIu till). I 111. 111. II -J. 11,'{. n I. iir,. U(). H7. 118. 1 •>' 1 . ( il.Vl' 1 i.u XXIf. LOASS .\C.\lSSi COl.I. \ ri.K \I,. I ('oll.it. r,;l ('(,r H-tiik I.o.nis .Mtrc!i;iii!Jis, .-IS Coll-itir.-.l A(l\;int,ii;( ^ (if (ioixl W;irrlu>u-,inir l.,,\vs l.o-iiis nil M, r.-|],in(liM- a I.ciiitiinat, riuuln.ii (,t' Hank .'■^tatciiK lit (if a Hank i'n si(i( nt i.;i\v ul' Wari'liousc Hi ci ipts I'liiroriii I. aw Iii>k !n\ol\((i ill l.o.'iii-, nil WarrlHuiNf Ut-cti])t^) (ndrr til,- I'r, s, nt Law I^MK- lit 1{( ,', ;pts SaiVgiianlcd Proltctioii ti) H.)1(1(TS of !{rc.i|)ts (iarnislimciil iidt Allciu, d I'.nalfy for l!l.n-,-iI I'm- of Hr(Ti|i!s Transirr of Tijlc to [.nuliT .... PAGH 329 330 ;;;)() 33 1 332 332 333 333 33 i 331. 335 335 336 'HAITI. H Will. CHKD.'T 1)1 1' AH r.xilAl ol \ UWK. lAolutiiiii of till' ( rrdit i Jcp.irtliiriit Sources of Crulit information . (in (lit .Vgfiifit'.s Dtitii s of Ol (iit Mm 1 lif t oiijiiuii lal .Noll -Hroki 1- . C'lian^f in the Hii>sintss .... Dtinaiul 111(1 Supply ol' (. oiinncrtial Arc.i.s of Hifili and Low li.itts . IJisi'ounl OliVr by Dtahr . Crtdits Size of Nottb cii.M'r. u x.\i\ . Hisroiiv Ol iswmm; i\ iiii.; rxiTF.n states. ••.'51. ( li.iraitt listii's of Karly Haiikinjr ••35. Rcl.itior's witli Govtrnnitnt i36. Historical IN rjuds 437. Some Ivirlv Banks . 1,';!. I'J r. IJ."-. i2C,. ■128. ^29. rjo. 13 1 . 4.'3ii. •1.33. 337 337 339 340 341 311 312 343 343 .•J4 • Sir, 347 347 3iS 348 CONTENTS -\.\i kSS. I.mni.ip; nn B.ink Stock . 4,'jy. First U.'iiik of the I'mUd Stntrs ■1- K). Success of the !■ irst H.iiii\ . 111. ()|)))ositioii to Uicliartrr ItJ. Second Hank of tile United Slat }-l.'l. li((li niplion of Notes in Specie ill. Misniana^eiiicnt of the Hank . It."). .Jackson Opposed to tlii- Hank . IK). State H.mkinp; 11-7. Siirtolk Bank System . . •IIS. \<\v York .*^ysleins .... ll-.O. Safety I'und System ... 450. Hond Deposit System ... 451. M istakes of tlie System ... 4.")2. I'"ree HankiTijj; .Systriu ... 4.5.S. Kxperienee in Otiier . States . 454. Indiana and ()liio .... (ilAl'IIR \\ XATIOXAI. HANKlMi 455. The Xational Hank A7I Hi3. I.iinitalioii of Di posit Ctirrciicy .■i7'..' [•■K Srasunal Demands ... .37.3 4t!5. Drplelioti of Rc*crvcii .37 !■ 4tit>. Aldricli-Vrcdand .\ct 175 407. hi" lasticitv ^7 '< 4»!8. Expansion of Hank Circulation S78 XXII .MOM.Y .\M) BANKINC SECTMN l-fi!*. Lack of L'nity in Our Svstmi •J-Tll. Sa\iiii,r.s Hanks .... •1-71. I'ostal Savings H;uiks . •i7ii. Gliar.'iittc of IJaiik Deposits PAGF .'^77 377 378 :^78 ( IIAI'II.H X.WII. RELATION- OF HANKS TO WALL STULET. i7.'i. \Iarkital of Dralirs in S'c'uritifs . i7.-|. Di tails of Ihr Coll.it.ral Loin 47(». ( rrliticatioii 477. Ii( striclions on Collateral ... 47S. C-ill Loan ILite l-7i). Hespoiisiljijities of tile Loin ( lerk 180, Un(Jig)ste(l Seeiirili.s tSl. (lose Helaliun Hetween Hi serves ami I'riees iS-i. I'iaii f,.r IteniedyiniT the Dangir ;ii Hidejiosit iiig l{i scrvts 48;?. (dnmiercial Hanks 48i. L'inaiifial B.iiiks 381 382 383 383 38i 381. 38.> 385 386 387 387 388 1 ( li Al'Il'li XWfFL nVNKS \NI) llli; t NlfKI) SI Nil's TULXSIHY. !Sa. fiesponsiliilily ol t lie S( creta r_\ of I lie 'rreasiirv f-'li. 'I'reasiiry ( aiisi s St riiii^iaicirs 187. I>eteeliM ( iiiTi ne\ Laws .... INS. I .\p( (ill Ills of tlie .^lerefirv 3!)l 393 303 ( lL\i'll,|{ XXIX. I.I KOIM, \N UANKIVO SY.STKMS. IN'). Hink of Lnpl/in.l I!»''. !)e\elopmi lit of l|„ I s, of CliK-ks 1!)!. B.-uik All ot isi 1 l!l'2. (h.-ir/icter of Hank ol i.nul.in.l Vote . . ViA. Tlii H.iiik .if i'.Mnrtn.} I>ri\,iie IfU I'AMking in France 3<).-. 3!)fi 3!)8 3f)n 400 40 J CONTENTS xxm BECTION ■Hj't. Bank of France 49(i. Deposit Currency Little Used . ■l[}~. Asset Currency H)8. Braiielics 4!)f>. Imperial Bank of Germany :aH). Intluenee of (ioverniiient 501. Mod. led on Bank of England . 5U:J. Reserves rAOB 402 403 4U3 401 406 406 407 407 •OOS. r,oi. 505. r>oC). .lOT. .'508. :)()!!. r,\u. r. 11 . :.i'2. r.i.i. :^ii i. 516. 517. r.is. 51!). 520. CHAPTER XXX. CANAUI.W BANKING SYSTEM. Origin of Banking in Canad.i . The Substruction of tlie Canadian Baiikin Revision of tiie (ieneral Banking Mcasur Incorporation of Banks Tlu- Branch Bank System .... Conditions of Note Issue .... Canadian Bank Notes Based on Counnerci Tiu' Ct nlral (iold Riserves .... Security of Note Issues .... Reserves I'ixed liy Eacii Bank . Reserves Conipostd of I'our Elements Call l.oa.is Investiii''nt Securities Loans to Manufacturi rs. Wli.ilesalers aiu Internal Bank Inspection . Bank I'.iilures in Canad.i . Shareiiohiers' .\udil .... Canadian Bankers' Association . . • . . 409 ig System . . 410 c of 1871 . . 416 . 416 ■ • • . 417 • • » . 41!> Mai Assc ts . 419 . 420 . 42. ■< ^ , . 424 • . 426 . . 427 ^ , . . 428 d l"arin( rs . . 428 . . 4"; . . 4;i:! . . 4:t6 . . 4 .'58 521. 522. 523. 524. 5 2. I. CIIA^TIK XXXI. CANADIAN nVNKlNf; I'KOIU.KMS. Brnnch Banks and tti«- local ( oiniiiunity . Concentr.ition i>f Hcs.tvi s in Br, inch Banks Numher of Banks to Population . !'>.-■;•.:■.•-;■! C'.!rr".'!!£ V >!• C.'ltl.'ld.! .... * *' i ' "~ - Criticism "f Bank Not. Issu.s . 439 441 442 443 VV6 MOXEY AND liASKlSG SECTIO!* 5'.>(i. Profits on T?a,.k-\ot,- Issurs 5'J7. ExcTssiv Surplus ,„• Rr.t Tunds . Jm ■V-'8. Profits of tl..- (■.•u,,-uiia„ Banks ...'■"■■ [r^ ^-^9. Hank .M.rp rs an.l Anial;ra„,ations ..'.'.'"" .^^^^■ •^■i". Hranclirs in ]nni-n Countries ...."' 4^^ •■'■'l- (ail Loans in \( w '^'ork ! •'•'-• '. all Loans in ( anad a ... •'•'■■'• '■"'"•" '•"i"^' ""i I'roniotion of Corpojations ' ' 'tJ, .'■».'M-. Loans t,, Dirrctors " ' " '. 5.'ia. Hanks an.! tlu Trust Con.i)ani,s . ^^^ r>:Hi. Intrr.sl Cliar-rs in tiio W.st .' r>:'7. Hanks ,,f .Suiall C.ipital !!, .'■>.•!«. Intrr.st on D.posits . . . ,' * L'^ .''•'i.O. FinanciriiT tli.' Crops ....*.' ^i! r-M. .Mo\in« til,' Western Wheat Crop . • ' ! ' ' ' 4-1, r>il. (^^'ommereial L.tters of Credit in Canada . .' * ' '.jl- .'"'I-'. Cinadian Clearin^r 11,, rises . . ••••/( 480 CFLM'TLH X. ' TFIK n.WKS AM) THK .,/Vi' "{NMK.nt. .'iLS. flovennnrnt Ndt.- Issu<'s r>n. T.-ixinir tlie Hanks * ' M.-,. Montldy Statements to ti.e Government . . " \i)„ ."•K.. flovernnient Postal and Savin-s Hanks ..." * ' ^qr, .'ii:. C|„aper Affrieiilfnral Credit ' tqs r>i>i. Co-operative Cndit SoeieH.s .... " " /' MONEY AND BANKING PART I: MONEY CllAPTKR I FUNDAMKNTAL ECONOMIC CONCEPTS 1. Reasons for Uic stiul// of inonri/ and Ixiiikiu^. — The study i»t' iiioiua'. I'unriu'y and hankiiio' is iieccssary to every person who desires a thorou^h<^'oing knowledn-e oi' business. Kvery one who has to deal with prices, w hetlier he be a prochieer or a eonsuiner. a working- man seHinanku,g. at least to the extent that he appreciates as never hefore the relation between a defective currency system and his own prosperity. lU feels that much of the loss and suffering of that .lisastcr was unnecessarv, '••"! that m tlu^ luture the severitv of panics mav be consi(leral)|y mitigated. U an architect should plan the construction of a l>nd(hng which collapsed in the first severe storm he would probably be lu Id for criminal neglect in .jisre- .uanhng the ja,vs and principles ' and displaye(' storm signals of the ap])roachirii4' lroul)lc. 'I'he intelhu'ent na\ iyator of husiness craft who could undci'stand the siwiiifieance of these si^iials sailed close to the shoi'c or kc|)t in poi't. while the iieedless and igno- rant put np full sail to take adxanta^e of the hi'ceze of prospi'rily. and found themselves cau<4ht iiiun\ares iu the s(]uall of Octoher. '.i. SciciiCL'. — Science is the stud\- of tlie I'elation of cause and efl'ect. Man has an inhorn curiosity to know (he reason foi- thin<4s. in oi'dei- that he may he master of his cnxironment and that lie may know how to produce desired effects through his jjowir o\ei" the causes pro- (hicini>' those effects. 'I'henl'ore. our ultimate aim in Situdyin^- the sciince to which \sc \vd\v addi'csscd our- selves is to he ahli' to make use ol' such knowledn'c in increasing' our husiness efhciency. and a\()idin<.i' waste of' elfoi't in materials thiou.uh iynorance. Money and Hanking' is a pai't of the scitrice of finance, which in tui-n is one o\' the hranches of the more ^^cni'i'al suhjeet of I'A'onomics or political economy. 1-. Finniicc. Political Kcon■ '" m,ki„K. M ■„,,. ,„„, ';"''^"'«-''" "lilii'iMsIr .■nts,„„l,„..fh„,ls.tl,;,„„,|, '"■ ..«v,„-.v „r ulnH, II,.- ..x,.l,a„,„,, ,„• ,„,,,,,,,,, ,„. ;;„ l-.Hls ,s a,v,„„,,I,sl,..,|. Tl,..„m,„„|,.„|,i,,,„|.;,|||,„,.. "" ''■ '"" l""''"<'f '■■ ll'^' .■"„s,„„..,.s. Wealth i, "';■. f'"'™ *;■'■ I"'-'' -'-I'"!-- ^.n ,„at,,-ial tl,i„„s tl - tl„„«.s „|„..|, „„,,„, H,c. .,„alilv ,,,ll.,| „tililv » "c . ,s .,,,,lv ,1,.. p„^^^^^^^ ' < > .;.■ „„l„-,,-lly. In .ml.T In ,.,.,,,tr Ihis .|„ali,v „f ;;'''''>,;■' '''^''7';'''|"''«-fisM,.,.ssa,,v -i,,,! „,.,;, t V U „.s: lal,.„. „at,„,.l ,.., -.vs. a,.! ..a„rial :.„„|, 1 l"s la t,,. t.™, ,„..i„,U, all tl,.. a,-tili..iai i„sl „„ic;ts „f ;"■"''"'"■;";-■- l."il.li..«.. ,-ailn,a,l.s-„hie|, l,a .-.. Ta-I,„„hg,i ,„„J 7.„.v;„,-.v,v.~ I„ ,,.,;,.,- <.nlcrp,-ise '-:•■ -\t"" ''-'"-t -1.- ti-t is. a t,,.i,,,ical ,U -- -k. Tl... ,„a„„ra,„„.,,. ,„„.| ,„„ „„,, ,,„,, ; '' 'f^- "'^ •'"■ ''-^t ""'l-ls ".1.1 l"-.K.c.ss,..s r,,;. tun,. -K "..t h.s ,n„l„.,, I,„M,, „,„s| k„„„. l„„v t ,,,, '"•■' .na s |,„... |„s ,al..„, ,,,,„, „„, ■ „,,^, , .^ ilJI.I sell |„s |in„|ii,.|. >^.i|MUH "■■•■"""""'■■. has ,„,tl,i,,o. I., .,,,,;,,,, I,, |,.,.|,,,,_.^,, .' '"•'"'«■ I"' -il,„aon..„i|,„,, ■„,ll,,h,.<.„„stmo- ";.i"l...a..h,n.. i„,„a„,„a,.„„i„„.. ft ,.„„fi,„.s ils" ■|"c,.v t„ u,, si,„iv ,„ II,, ,„.„,„„.ali„„ „„,| ,,|ali„„;„r "'^' ""'"■ '''^''o'-^ "'■ l""'l"<' and capital o()()(ls. If cxcrybody {)ro\i(lc(l I'or his own wants first, hy ])r()(luciii^' what he coiisuincd, there would l)e no such tiling as husiness and eeononiies. IkisiiRss he<^ins the moment one peivson prodnees some- thing- for another hut de|)ends upon another to supply him hy exchange with the things he needs. Since i)rac- tlcallv nohodv is economicallv self-sutlicient in these days, cveryhody is concerntd w ith husiness jji-ohlems. 0. liitsi>i('ss iJic rcsidf of spccudrjiiUni of labor. — This fact of the uni\ crsal division of lahor or specializa- tion of lahor is the vei'v foundation of our eeononiic sys- tem. The ])rocedure of a modern man in supplying- ifis wants is \ery indirect. If he hasn't some already, his first move is to supi)ly himself with money which he ex- chanyes for the ^fjods ^ith the merciiant. The mer- chant has previously ac<|uired the ^oods in a roundahout May tln-ouoh the channels of trade from the ])i-()ducei's. The producers ai'c organizations of men who take the material.-, fi'om their natural state and work them up into finished ^'oods capahle of satisfying- human wants. The work of the world, in which we ohscrve nearly e\ cryhody so I)usily cn<>'a,i;ed. is ])i'0(hiction. Sometimes it re(iuires very close anal\sis to discowi- how some occupations assist in ])repariny noods foi- eonsumj)ti<)n and use. At fii'st siyiit such occupations as l)aid-:in_u'. hrokera^c, accountiiif^-, etc.. st'cm to haxc little to do Avith the production of <^()ods. and yet as we shall see Curthei- on, they arc as neccssai'v and elfective to this end as aoriculture and inanufacturin""^;^-.n P^'-sons maU. utility just -is in.lv n '"""• "'^■^^' >;''^"'^ '■""'^■••<'>-tIuM,uniuradMrer. "i.y-. Cnd money and hank- '" *''^' amount <./• utihfv -f i' r ""'"'^ 't's of ownershij). There- fore we see that our modern civilization has been de- pendent upon the growth of commerce, and future developments in the division of labor will depend upon tiie facility with which its various classes of conmiodities can be exchanged. 9. Tardji recognition of value of iwchnngc. — It is a curious fact that this most vital ])art of civilization and commerce, money and banking, has not been understood and ai)preciated until recent times. A few centuries ago, the merchant was regarded with susjjicion and })laced not far above the thief in the social scale. Tiie luerchant who bought an article for $1 and sold it for $E.)0 was thought to have robbed the purchaser of .)() cents. The banker who loaned money at interest vio- lated one of the laws of the church which forbade taking of usury, as interest was called at that time. Tt is oidy in very recent times that the ])ersons who perform this most vital economic function of exchange -the bankers, financiers, brokers and merchants — have been understood and a])])reciated, and even yet we find the medieval idea still j)revalent among a large class of peo- -Hon :.:::: rr^-:;:::;: ••:,['";:'-■■■-" '-^- "■Iv. ir uc t-.k-,. ., ' ''"'''"' Pn>atu |,ro,. an,l „tili.„ti, !• ' , ■ •" ^"•'"■'' *!«■ I>"«rv.li.,„ '■'"'•i'"" ..(■ llUM,-m ,.,,.'',•' "I"'i""-"t'>l-tl..- lull I>er.s,>„ Is „c.,ltl,v. „e nn.,,, tl,-,t I "" "">■ " --.''■™ii';;:;;i;,:';f:^ rT"'"-^- ""^^'""' - "-»>■ "r'- -■-'"; ::^:"..:n::'':: ;::::;;:::■- '" "■"""""'■ s.rvice of the uier- 1 f FUNDAMEXTAr lUOXO.MIC {()N( r.I'TS I sliarc of c()r[)()rati()n stock is a claim to a certain portion of tlic cariiiii<^'s ol' a coi-poration set aside by the direc- tors as a\ailal)le for dividends, and in case ol' llie dis- solution of the corj)oration, to a portion of the assets. A I'nited States note or <^reenhack is sini|)ly an evi- (K ice of a claim against the (io\ernment for payment ot' a certain number of dollars on demand. The fact that it is readily accepted by evciybody in exch'ui^e for wealth does not make it real wealth. A ^'old coin is ..al wealth to the extent to which the meta. it contains has utility. In the case of all the other forms of money we are con {'routed with a prob- kin whether to classify them as real or rej)resentative wealth. Money undoubtedly has an indirect uHlity in so far as it assists in ])i-oduction, and would seem to ^o alon^- in the same cate<.>;oi'v as railroad cars, wiiich in- crease the utility of noods by niovino- them from place to })lace — money increases the utility of goods by mov- ing them from owner to owner. \\'e have seen how the division of labor, where nearly everything is the subject of pi'ivate property, recjuires continual excjianging of wealth in order that it mav .'ome under cr-itrol of the ])erson.s wlio can best utilize it. There is another conseciuence of tbe division of labor: It re(juires that the factors of ])roduction l.e organized in great groups, in order to be most effec- tively utilized. As the result of this tendency, we have tbe United States Steel Corporation, with its 1.50.000 men working with a billion dollars' worth of natural resources and ca|)ital goods, and with the ])roduction of iron and steel. This grouping together of a large number of industries. (M-iginally indej)endent and sepai'ate, has eliminated a vast num))er of e:" i anges. From the ii"on '^.\\ 10 -MONEV AM) ISA.VK.^. ore at the n.inc to the finislicl steel rail there i, „„ ohnnffe„f „„Mer.hi|,„(li,e,„„t.™ls 1^. l„lc^-c,ti„„ of /„,/«.„,/.. .\, :, e«„seq„ence of tl'; ' l>d„,e. I he ee,„„„„y „r ,|,is i,ileK,ate,l te.ulenev -I '"'■ ""..e a,,,,a,e„t ,vh.„ „e have learned h.,« i , ^ la,l, „ ,„ I e „„,.|,a„,s,„ .„■ exehanse t„ w,„-k ,„■.,,,- ulu As >ve .l.erease !h. ,„„„he,- „r exehanifes in lie '"■■'"■'I l;™ ..H,o„. we .educe hy s„ ,„„eh Ihe ., lo tiiiiitas l„i- hreakd.ivviis. ™ These |-,mda,„e„tal ee„„„,„ic faets a„d |„i„el,,les are n.ent„aK.d I..,,. , „,„,,e, he anient a, ,,■.,,,',. i.lea,,r the !'"l-lnal syste,,,. Voney is an h.str ent an.i hank- Ik -ehy n,e,.ease the n,a.e,iai n.llare of ,!,. ,„,, ij '■!;■;'""'■"«"- -l'en.sal,l,. .,., s ,„■ , ;;""■" " "•'■ ••'" ""-■ vr .live e,r,„, no. ;;j H al,ae,..n,d'i,se,liea. ,. V, hieh « e sh, . stdl he ,„ the state ,W indnstna! harharisn,. '';."'"' "*"l"-iv.'de,. rn,,e,-tvi.n..t. as a sreat n.anv "','"'' ""•'-'■':• ""-'^-m the hnn ,ni„d: I? is a ,„, i neral *", li""' '"■""'""" '""'''''^ -.nnnnnsn: is "' ■"■™'l""" ^M-"liarly personak The «,., ''•'"«"' "-'^ '"'"" I'vidnals, hn, heU.,,,, ^tr:jr\''"T'''''"''" l«i'-'--liH.lhana„v coiitiMC't of ,fi//(f pro qiu). CIIAl^rKR II KX( IIAXGE 1.*}. Ec^;lnnin^ uf cvchuiigc. — lU'^iilar cxcliaiige did iiot t xist until oiu' tribe had a .surplus ct' j-articulaf com- inoditii's wliicli were desired by the tribes lia\in^' no facilities for produeiny- tiieni. These artieles, which W'-re sui)erHuous in the tribe j)i'0(iuein^- them, had a j)e- euliar vahie to olliei- tribes whieh ])erha])S eould not produce them at all. If Ihese commodities happen to be of an imperishable nature, as pottery, weapons or furs, they mi^iihl easily come to have a ux' as a medium of exchange i'or home products. 'I'he necessity of ob- tainiu;^- such commodities from otlu r ti'ibcs gave IIk lu ;i kind of lixcd \alue, and thus llicy became the most convenient standard by which the xalue of all other thiniis could be compared. In the c\olulion of nionex a \ast numbi r of thin;..?s have been used foi- tlu |)urpose of tixin*;' \alues. but practically all of them represent sinplus products which could be exchanged with foreigti tribes or nations for imported wares. Ivxchanging of goods within the tribes was a \('ry slow development, and when it did dcNcIop it was most natural ior these articles ot' foreign origin, with a fairly \ >>Miii authorities economic history has been di- vided into thi'ii' stages, aci'ording to the method by which exchanges were made: liartcr, money and cicdit. 11 r T7 ^ IS ^"IM.V .\M, liANKix,; III llii^^ tirst or ■■|,:„.|,.,." ,, .«""il^- III tl,.. sc-c,„„l , :f *"";- "'■'■'■ '■«'l'»'i«"l l',,,. ■■.".■-•ii.,,«x.a,,iii; ".:«r ;:::'■' f '^ ''•"'- i-.! ■iianwii.iiiiv ,, ;V '''"'^''''''''■"'■'I'ltiiitv .f„. ^'---l^;™^, ■':,;';::■''*"'',';'■ "*'«-..,„„• '"•Ills. t„l,a«-c,, etc ,■.,„„, t„ I '■'■ "''"'"■ <"iii<' f" the stn.lv „| ■,,|,„.- ,1 , ■'" "'■'■ "''"I "<■ '■^"■'■"■■^"IlK'l, C.„,|-,.sv ■ "'■ ll„. |„.i„,i,,,i extra exd,„„„e , ^ " "" f .""'^ '^ '"i'".- This 14 liar I '1^1 r "'■ ^'i'p'"V"..ii> . :; ':;:r^^■ t;^'''«"' -^ ''•■"^i..V,va,-h.,r, ',"'"'''' '"''■l""^'l''»cc '<■ iiiiliilus k "^^ '-nH,st,h,,i.„n., ''::''' ^'" '■■•■'•''■ '"'■<■ I. ''"Ki.'i«M"i.i,Hi..d ,,!,';:.';;'■'■■ ~ "'"''''''■''« '-i- ""• I'"". !■> .1 UK , , .1 ;','"'■ ''"■■""">■ "'■ '"'"I ^1' '-■i--^i«v, ;r ,:';■''■ '' '"""""■■'• '■•"ic '■-■'"ill iimi ii , ,■■ T "■"' '" '•'""'^^ -"I '"I- --..■ .'.::: an-: :';'■'"'! ■■ '■ "■ ■- t.. Ml ,■ ,1 „,,„„,,, , .■ " ."•'■■ il-«.ll.l".IS |-,„- „„„ -■-■-iti., ;;: -''"rv ■■";■''••'''«'■ * '^"'■"•^' np„„. ■ """•' "'-""''I ""I I- .l.:.,n,k.,I 15. Moucif.-^ M,„,. .. : ( EX('IIAN(ii: i;3 ])nt wlicn it is cxdmn.ucd for other coinnuxlilics we do not call the operation hai-ti'r, although it is an exehan^-e of ,ii<>otls for <4()0(ls. 'Llie I'aet that one of the ex- niaed articles is accei)te(l solely beeanse it can so easily be exchanged for something; else whieh the hohler reallv wants for nse or consun!i)tion, introduces an en- tirely new principle. Trachnu'. whieh was so limited, clumsy and iniccrtain ill the stat^^e of barter, now beconu s easy and irnular. If 1 have somethinu' of vahie I do not havi to look ai)out to search out the person who not only wislies to ])ossess it but who has somethin<^- whieh I need. I have simply to tind a persor. who has money, because I know tiiat by accepting- n..)iiey I can «jet whatever 1 wish with it. Kxi-hanoods. 1<). Minu'n represents incomplete crehau^es. — All money existing at this moment rc]u-escnts incomplete exehanu'es. Hvery ijosscssor of it will soont i- oi' later otfer it for goods, because money has no use ixeepl to be spent. 'I'herc is no utdity to be had from it until it is |)art('d with. i'he miser perhaps realizes a i-ertain satisfaction fiom the mere jjossession of monew but with, the r:ition;il iierson the possession of money repre- sents a posti)on((l satisfaction. Quite naturally the an- I't M()m:v anf) banking ticipatioii nl' future satisfaction to he obtained is (j-iite pleasurable, but to say that thr money rather than the aiiticipation is the source of the satisfat '-On is to fall into confusion of thMonht. 'fhe boy with the circus ticket in his hand is d with joyous sensations when- e\er he gazes upon n, A railroad ticket to California conjures uj) the sniell of orano-e o-roves and other de- lightful things, lint neither of these thinos is the real source of the gratification. The miser is the l)oy who prefers to miss the circus rather than to give ilp the ticket. 17. Credit, a postponed /xiz/meitt of m one //.There is a third stage of economic evolution bcyniid barter and money— the credit stage. .Tiist as exchanges were lim- ited and chimsy in the barter stage, necessitating the in- vention of money before men eouM s])ecian/e in |)roduc- tion to any grewt extent, so the time arrixcd. in the Middle Ages jjeriinps (although Hie use of eredit was not unknown in the ancient world), when iiKMiey. e\ en the most !•( tilled forms and systdus df money, liecame too cumbersome. In this last stage exchanges can l)e made NviHiout the use of money at all. A man uv.y be ;ii)le to buy and sell without |)ossessing an_\ money, or even ;'.ii\- [uoperty. The consideration he gives may be merely a promise to pay money or its e(|uivalent value at a future time. In this last stage exchange frees itself entirely from former limitations and under speeiali/ation of industry can ex- t< lid liiitil scarcely any man |)roduces the thing he liim- s( If consumes. Kverything is i.rodueed for the market, ■•ind the market does not fail so |..ng as the maeliin- er\ of credit is working sniootlil\. I 'nfortunately, ci'cdit Is lil.i' fli-/. .iilI ;♦ :.. ..li ..11 -ii • 1 I . ■ ■■■-"; :'~ "..-■. :'. .; I ; ; ; ii ii',' i "i">iiri i'iSK, i>ur iiolx ly w,.nl,| think of foregoing the use of tire j)e- i:x( iiANcii: 15 cause liouses sometimes burn down, nor would auyl)ody advocate the abolition oi" credit because .soinetinies its abuse brin<4s on coniniercial ilisasters and panics. Throughout tliis book the word •Y're(Ut" will l)e used in a strictly technical sense, that is to say, with the fol- lowiiio- niJaniuir: Cmlit is a fiostponcd pajimcni of mniu'ii. The word is employed in ordinary nsa^e to mean the ability to borrow. Thus, a person has oood credit when his reputatio?i for financial inte;'^- rity makes it easy for him to borrow the funds or i)rop- (.rty of others. Much of the ditliculty and confusion i.:- herent in the discussions of credit j^row out of this va^-ue usa- will l)e possible. bur definition imi)lies an ineomilete exchantrc. One side of the exchange has been comi)leted, but so far no c(iuivalent has been rendered. The payment has been postponed. It is convenient, however, to re«rard the credit as itself an tMiuivalent and a thiiio- having' value. If a merchant sells a bill of ^oods to a customer and agrees to po-ipone the payment for three month.s. he has received foi" the ^cxxls a jjromise, which is valued by liim as the full ((luixaleiit ol the ;^(„)ds. If this j)rom- ise is put ill the form of a promissory note (which is simplv a documentarv evidence of the promise) this ])romissorv iiote is a concrete object ol value and can be itself exchanged for other things of value. IH. Cirdits as media "f twch a iifrc— The fact that a promise to pa\ moiuy i< a xaluabjc thing in itself sug- gests immediately the possibility of using such promises as a medium of exchange if they can be put into such I • • 1 1 ■ I i :i t I , i I form iiiai iiie o\\nei>iiij» iil Tiuui .;;" ;;;;■ ;; ::• ;;.■ ;::-::: can be trans iVrred from hand to hand. .lust as tlie 16 MONEY AND HANKINCJ value of nionty is an aiiifit-ial (jiiality, created by its ready exeliaitoeal)ility, so credit may come to have a value for l!ie same reason. People accept money read- dy in exchanoe i'or anythino- else because they know- that it n-ives them cf)nimand o\er any j)iece of |)ropertv that is for sale. In other words, because it i.s converti- ble into ])roperty practically at all times, in all places and under all circumstances. Likewise, credit has value as a iiudium of exchange only to the extent to which it is convertible into money or directly into pro})erty. C'wii- vertibility is iherefore the very essence of the value oi' money and credit. Money we saw was simply an indirect barter, the op- eration beino- len<«thened by the use of an intermediate tiling- called money. AVith the use of credit the o})era- tion is stili fuither lenotlimed. and the steps in the com- plete transaction may run as follows: (ioods are traded tor credit: credit is traded for money: money is ex- channt'd foi- yoods. Sui)pose a mc'cliant buys a bill of dry-ank. Tile manufacturer may use this cash to buv cotton from the eustdtuer of Hie niei-ehan! wIk. consumt's the dry-o'oods first bouohi. Kedueed to its simplest terms, the cotton urow. r has bartered his cotton for clr.th, i)ui liie iransaetion lias in\()j\ed a very compli- cated series of exehauMCs in ordei to accom|)lish it. I EXCHANGE 17 i i This c'onipk'xity iiitroducca hy the use of money and ( i-eail ^v.)ul(l seen'i to inercase the ditlL-ully of exehan^- i in- goods for o(„)ds, hut in reahty it facihtates the proc- ess hnniensely. While seeniin-ly the most expensive mode of making exchanges, in reafity it is the most eco- nomical. The profits and salaries paid to the merchants and l)ankers are added to the cost of the linished clolh, and the planter must give so much more raw cotton for it. hut if these middle men did not exist it is likely that the i)lanter would have to manufacture the cotton and the cloth himself at a hundred times the real final cost. This is a case where the most indirect route is in reality the shortest and chea])est. 10. Mducji (111(1 credit rcpresrufdihrs' of xccalth.— Monev and credit are representatives of wealth rather than real wealth, l^iis statement seems to inxolve a ])aradox because of the hahit which lias been ac(iuired of regarding as wealthy a person who has control over a large sum of money or credit. The ])o|)ular concep- tion i)f a Mcalthy man is very likely to approximate the caitoonist's idea of a rotund individual wearing a sdk hat and a costumi" witli a dollar-mark pattern and sur- rounded hy bags of specie. The wealthy person in reality is one who has control over a large amount of goods or real weallh. How- ever, in est: ' .ding- wealth we find it convenient to reduce it to a sum of dollars' worth rather tlian to enu- merate all the items of goods contained in it. A mil- lionaire is not a person who owns a million d(illars in UKMiey. but whose properly rights are estimated in lerjus of dollars. The millionaire may rarel> have in his per- sonal possession more than a thousand dollars in money. j)iil because his proi)erty rigliis are more or less iwii vertil)lc ifto money we fall into the error of carelessly VII ,> IS MONKV AM) n.WKIXG consideriiio- I'm as possessed ol" a miilioii dollars. Un- less we think elearlv on this point and rid ourselves of this error, we are likely to find ourselves hlocked in dealinn- witji problems in money and hankino-. Tile value of money. e\eej)t in the case of metal coins, which have a commodity utility, is dependent ujk)!! its convertihility from property int , ooods. If ever,\!)o(iv attemi)ted to convert the money and credit in the world into ooods simidtaneously, money and credit would lose its value entirely. It is oidy hecause there is a real need for this ))aitieniar kind of utility in makino- exehan^res that the value of money and credit is maintained. The value oj' money and credit, then, is dependent entirely uj)on a habit which })eople have of accepting- them in exchange. When there is any reason to doubt that money and ci-edit will be accej)ted. we find its value shrinkino- away and are confronted with the phenom- enon of a dej)reciated currency. 20. Classification of tccal tit. -There are two kinds of economic ' fish he could have obtained without the use of the canoe. If he could catch five 1'1'sh without the canoe and ten fish with it, the canoe might be regarded as the source of the income of five fish. Capital, therefore, has economic im])or- tanee only as a soinve of income, and its value is en« tii'cly proportioiiate to that income. When men reached the stage of calculating income in dollars' woiih instead of in specific commodities, then caj)ital. the source of the income in dollars' worth, be- gan to be regarded as a sum of value rather than as a machine or building, etc. 'J'herefore. we might say that cai)ital is an abstract conce])t of the value or dollars' Morth appertaining to the source of an income, whether .such source is tangil)lr or intan<>ible. The merchanl itgards as his ca|)ital his stock of ^1(),()00. Sui)i)ose this SI (),()()() is the average for a number of years, whieli ean ])e made a safe basis for future ealeulation. If this manufaeturer were asked to tix a i)riee on his establish- ment, how would he '^o about it f Perhaps the whole plant, maehinery, buildino-. cte., did not eost more than ><1 ().()()() originally. Init tiiat its hi<>li earnini>- power is (hie to the ])ossession of a ])atent on eertain of the ma- chinery. ()i)viously he wotdd not l)e willin()(),()()() in order not to be a loser in the transaetion. He eould not de- mand more than Ji<-2()().()()() beeause no purchaser would \)v willinu- to buy a -^lO.OOO ineome at a priee whieh would purchase a $11,000 or $l-.>,0()() ineome iu the se- curity market. If the owner of the plant thouo-ht of incorporating a company and issuing shares oi' stock, he would be con- i'ronted by the same i)roblem oi' placing a valuation on the business in order to projjcrly eapiiaiize the cm poia- tion. In this case if the income were practically tixed ^ -f sa ^inVF.v AM) i{\\K[\(; at $(MK)() juul there was a wide MKu-lut lor the shares, 't IS ikely that at a eapitahzali.,,, of x-Joomo the shares wou hi sell at scM.ewhere near par. That is to sav, the ^rtal sn.n of their market vah.e wouhl he about !J<20(V Oipitah/atlon, therefore, is ^he process of plaeino- a vahmfonuponthesoureeofanineo.ne. T f a eorp.M-a- t'<'" -s •■ ^»'^"' is very hmite and bankinu. tJ^ IXlHANGE 23 one cannot l)e nndcrstool without mastering tlic other. '2i. Demand for capital ^foods. — C'a[)ital i^oods arc |)i()(hicc'(l hy iiulnstry for tlie market, just as are eon- siunption «;'oo(l.s. They are ])ro(luee(l either to till a (leinand already existiufj^. as when the nianul'aeturei-s work on contracts, or tiiey are made in anticipation of a market when they are ready for sale. The demand i'ov capital goods comes from enti-epreneurs who wish to use tht'u in industry foi- the production of more ooods. Ik-fore the entrepreneur can take ea])ital <>-oods off tiie nia''ket or <>ive orders for their manufacture, he must havit ])in"chasing power. This jjurchasing power he mav ac(iuire in a variety of ways. First, lie may pos- sess the purchasing' power or caj)ital as his own prop- erty; second, lie may he entrusted ^v!th the purchasing power or capital of other men on various terms, either for a tixeci compensation per annum or for a definite share in the |)rofits of the husiness. Tliis })urchasing power exists in the form of money or credit; in most cases it is hank credit in the form of a deposit, against which checks can he (h'awn to lU-.ke j)ayments. It has its origin in income which has not heen spent for consumption goods hut which has l)een saveiL Incomes are deri\ ed originally solely from pro- duction. Those who gain a personal income without producing or assisting in the productive pi-ocess appro- priate the incomes ol' others; hut originally every income 'vas the product oi' someone's productive industry. 25. Money incomes. — Under modern conditions very few of the producers take a share of the })roduct as their income. They prefer to convert the product into ])urchasing ])ower, that is. money or credit, and dis- ti'ihute the proceeds as money income. This money in- come, however, is simi)ly re])resentative of the products, Hi MDNIOV AM) RANKIXC n 1 ,s o„,„,.,.t,l,k. „,„ .,„, ,, i, ,,„. ^..,i^, ,„, j|_^ _^^^_^._ K . iKivl,,,,.. ,!■ IIkm i,„.„„K..,,,,i,,,, |,,„|.„, ,„ v»c I „s |,u,vl,.-,s,„f; |,„u,.r ,-„ll,,,- lha„ ,ss,-ri tli.ir '■''■'." ;' "■'■'"'" """'">>i of f.N,s„„ii,ti,„i j,,„„|s. t||,.v liiNujjv tile furul ;/'"''"'nKp,,,-,K,.,colal,st,,i,,inKiV,,,,.s,,c.,,, -« _,n,K.„n„.ly, l,„t r... ,l,c p,„,,„.sc of%e..-li„'„ - --'■'«■ ".i...c,,,uc.. Tl,is conv>.,-.si„„ ,„•,„„,,,,,„ ,. ' .""" I'™'"'""" «■ ^ -tl.«- thai, .,:„s.„„,.ti„n «...l..s,.al,„v«t,„c.nt. I (• it „..,,. „„1,„,. , his savin..- f,;;:;'V' ^ " - p,-..!,,,,.,!. .sa,.,M,„,L., "■ """"," '--I'"-I ■-■l™.n...l.a,„l'a,va;vait- n,« :< M,arl„.| s„„„«Ik-,v i„ ti,, w„rl,l. T!,,- „n,sp,,.. ,i.T:,nl''""'' "'' ''"'"""">"- .\ ".,y s,„all p,- "••'>"" ;'l'."l"ll,isi,„,,„„l„i,„,vas,.|„ss !<.„,, I„. .-;. yU,. «,,.,,.,. pa,,, ,,■ ansa., api,a, is ,;„.„ '»" I. ..Il,.a-.„l,vp,v„,,„.. |.„-i,„,,|,„,„| .n,,,,,,, ,,, ;'.,;:,:;"■"'■ : r '•"'"'■ ■'■•■'I'i'^.'.^i-.siv,;,,, .''"^■■'V '■'"''''' '-i"ni„.,.„„vp,.,.„,,„. „,„, « s i„.,,.|..,.,,„.p,,„|„.,,„„„,,„„|^^ r„si.,l„. a- ::.: -!"-:'^'"> l'"-li„ir„,.sl„„a,l„,-,|„.,„„, .|.,,^ •- i'.,i,„|,s i,„y i„„„K „| ,, ,.,,|,„.„,_ I EXCHAXGi: 25 s\liic'li llms obtains the (•a])ital and expends it in rails and eciuipnunt. Secondly, the saver may de])()sit his savinj4's in a eoinniereial hank, in whieli ease the eapita! finds its way into the liands of eoniniereial borrowers of liie hai\k and is nsed as workin<>- capital to l)ny raw ma- terials, to pay wa^es and to carry cnstomers' aceonnts for short periods. Thirdly, the saver may himself hny stocks and bonds from a bond house or a trust company, and thus make these institutions his an uoods. It is only wlun till' capital is in the hands ol tlii' cntirprcncin- that an in\istmenl can take ])laee. Kntnpreneurs are con- stantly bidding- i"or the use and conlrd <»f tliis new capital which is as »'onstantly aci'umu!atint>-. 'I'hc en- triprtiKur who can offer the best raU' of interest or the lii-lusl di\i(Unds with the lust secinity has the ad- \anta,<4(.' in this competitive biddinii'. I'ndei- our modern coi;ditions of industry the lai\ui' corporations ari' liktly to lu- able to use this capital to the best advantauc and hence are in a jiositinn to make tlic must attractive ofl'ers to savers. 'I lieit fore, we find an e\er inereasiiiL; jii iceiitaue <*!' the sax in^s ol the communit\ flow Inn' in that direeli'in. 'I'his is to the ixiblie .idvantaiic, in so far as the corporation is able to ti. unh/e nro< luct ion woods to which the capital ^i\r. 2(i .M()NJ:\ AM) HANKING tliem claim, and the final irsult is an increased amount ol' product. J'or this reason, any syst'in whicii facili- tates the tlo,v of capital from the savers into the hands of the most elHeient entrejjreneurs is a distinct economic gain. All thr highly specialized financial institnlions perform this economic service, and their productivity, indirect tluninh it he. is to he r>easured hy the increased elficiency oT th.- eaj)iial which they have diverted into the most produc'ci\c field. The stock exchanges, the financial aiid commercial hanks, trust companies, under- writiiin; syndicates and all the machinery of jii^h finance are ccoik niically hcneficial to the country in the degree that they perform this function. Furthermore, this high development and delicate ad- justment of tinancial institutions is only possible when the currency of the country is of the soundest and most sell lit itic ch;iracter. Kvcry defect in the currency sys- tem makes it more .iiUicult or hazardous for such' insti- tutions to do !)tisiness and is a handica|), the etrect of which can he measured hy Ihe diminished eHiciency of all the industries of the country. The man who says that cnrreiiey and hanking (juestions arc no concern of his would prohahly he surpriNcd to learn that iiis wages are miimIK r«.r tlu prices ol' the no.xis h<' buys .•,ie higher (»n accomit of some weakness i- defect in Ihe system uhici. tin currency ref.u-min -, i-> ^iiiti 1 1. 1 1 IV V 1 11 1 < |.. » >»7 2H MONKV AM) BANKING neur J.as little indnccncnt to encourao,- any new enter =:9^stt;;l,j:~':;;:;r:; ;;; ,;;;;:i:;rsss,;;;;2;»-::i • .s likely t„ he „ ,,,„„„ „, .^.,,, ,,,;, ^^.,. ;., > "son,-... ,,t,,,„.,l t., tiK. ,,,,,,,«t, ,,,:.: 1.,,,. in , ''• '■'■■'.'"I ^" ' - l"Kl.-l " a,..s. .Altcnu,!. |K.n„,l. „7' ^.•iiii conditions of \alne. The tact tl.at enr.vney and l.ankhur have -i most ?™''''''-'"-"™t. Ik. ,•,,,,,,.. ',,„,.» .r,, . '"' '""'■'■ "';:-^- I"' !-"■ I'""-I1- /•,„■ <.ha„„.c, i„ J., e . i ImMrii-ssn.Mililii.iis. W<"ii.il '>!'- ''V ■■''"•■ ""1'- l«."l<. IV.r ™„„p|,, ,„, |,e '.'","""■'' "'''■^' '■> • l''-™"i(l,s.„„H|,i,V,,,' ,' '*;/''"'■■ 7 '"'■' .".•alm.sl,,l„r,vl„,,l. "l'l„.v .. '■' ' • "■•"'- »"^l't 1- .x,..-,,.,.,! |,v ,,vi„.. It; ""'•" "•>' '^ "'■ «i...<. This- >,,-,„„„,: ::":^":7", >■ v-l.ik ,,, ,,;''. 11 IS ncccssaiv. to liavc n ,.()nnn<.,. ,.,... < " • j^ • ■■•'>'".>.<., nu-as,nvnrd<„on,Mia- -- -wn.i.nis ai U-ashin.tnn are k,.p, ..,,,ain vard- VALUE o( sticks, wei^iits and vessels wliieli are the standard units of length, wt ight and capaeity. W. Definition of the dolUir, — Jnst as Congress has declared that a certain length shall he a yard, so it has also declared that the unit of ^■ahle shall he a tlollar, of 'I'^.'l'l grains of pure gold. The only definition for a dollar is that it is '>'.\:1'1 grains ol' gold. All other so- called dollars are such hecause they are convertihle into standard gold dollars. In this convertihility lies their value. 'I'hey are not standard dollars, hut representa- tive dollars. l*rice is sinii)ly value ex])ressed in terms of dollars. If T say this hook is Morth <$.5, I mean that it is exchangeahle for live times 2.3.22 grains of gold, or its e(iuivalent. If we speak of a ])i rson as heing worth $.")(). 000, therd'ore, we mean that he has a legal title to |)roi)ei'ty consisting of various forms ol' wealth luuing a total exchange value of fifty thousand times the ex- change value of our unit of gold, oi- its e(]uivalent. In order to I'cali/e this exchangeahility. howcvei-. it is first necessary to con\ei't th.e wealth into money, which is oi-dinaril\- very dillieult to do at the market price, and then (Mitnerl the money into goods desired, which is \v\ easy to do. .'U. I'jiVchan^cahUitii the sole iitiliti/ of nioiiei/. The d( sirahility of money as a form of properly is due solely to its ready exchangeahility: for any ollu c pin'pose it is inferior, producing no income, as do factories, stocks, honds, etc., and rc<|uiring extra |)i"eca(itions against theft. Its iiianal>ilit\- is simpK another form of its e\( Iiangcahility. The honowcr purchases the in- eoinc-yielding wealth and promises to divide the income ">> i 1 11 1 in ii i n n I 'V2. (told flat (III ideal staiidurd. Gold is verv far ,'30 -MOMIV AM) H.WKINCJ from bc.n^r an ideal stan.lanl of value. Suppose the yankst.ek had the ohjeetior.al.le habit of shrirlkin'^ an,! expa.Hhn .- hein.- thirty inches one year and fortv h.ehes the next ll,e merchant contracting to take one thou- sand yards of cloth a year hence wouhl run the risk of losing, on tlie deal merely on the Huctuations of the yard-st.ck The ;j .>o gran.s of ^chi a.id the value of the thin«- to be measural" Ihc -atu, C.U1 be altered by the chanoes in the value of «ohl as well as by changes ,n the value <.f o-oods ]f wheat falls t(, .-,0 eents per bushel it mav be because of an alteration in the relation of demand to supplv in ref- erence to wheat, or it may be because of a dian^e in the value o money. If the price of wheat alone has H.an^r,d. while the prices of all other commodities re- "'ain stable, the conclusion must be that the changes were due to causes affectin^r wheat alone. Ifowerer It all prices have shown a tendency to move in the same « n-ecfon, especially when it is reasonablv certain that there have been no changes affeetin^r the relation of sup- ply and demand of these ^.oods. the explanation of the '••'" '" j)nces must be sou^d.t i„ „,onev itself tnbute,! the general fall of pnees to an increase in the value o« o-„ld, the sole .slandar-. :J.5. Maroi>,a/ utilitn.-^h, a small eitx- then' niioht he one i,ers<.,i uh„ u-oul,I be willino- and ahle to -ive anv amount up to Sio.cm for an automobile: the.x^ n.ioht 1.0 another whose linu-t is .^!)..-,0(): and another at .^1) 000 and soon. As ue o,, ,l,.wn. the number of j,ossible p.irehasers mereases so that there nnohl be several lum- that e.ty lor sale. The n.an A would pav .^10 000 '•:;'''^f'-'-''<'-'-tlK.l..ows there ar^lnj He sol.l. so he ret uses to pay as mueh as he would if there -re only one for sale. To dispose of the three auto- '• oJ-. tlH. de.der nurst not .lenwmd n.ore than -l^lMmo ■ ;'•••'' i-- ;• H. and (- will supply tlK^^^^^^^^^^^ tin s estabhsh the ,narket priee in that eitv. The auto- JH.'f.. OS may not have eost n.ore than .^1.000 t,, produee !;r'"''':^\-'-''''--'--.l.tiuHxin.te,, ' 1 lie xuM'i' IV ,l,.f. ........... II.. '^ I'liL*.. is bv^l ' .;;--=;; = =;=^- 'v ''-^ '"ar^mai utihtv." that is.l.> ll-eutd,t;,.| the.automobih.pM,,|iasedbv"c'.wh. lio i \ALri: iw is callcil the iiiai-<^inal piii'cliasrr. Mar,uit) means "cd^c"' and C" is the piu'ehaser who is on the <'(lu,-e of the market, ir there had l)i'en oidy t\\() antomohiles. he wonhl not ha\e heen sn])i)hed: il' there had heen t'onr instead of three for sale, the priee wonhl liave had to he reduced lo .ss. .)()() and tlien 1) wonhl have heen the purchaser on the margin. 'I'his example is of course hii^hly the- oretical and would prohahly ne\er liai)])eii in this way in I'cal life, yet the pi'inci|)le is true and \\orks out \\ itli ^■I•eater precision, as there are a yrcatei- nnmhci- of huyci-s and sellei's. and as the know Icdyc of each othei's" rial desires increases. .'J(!. Miiri^iiud iitilil// to I lie iiuliiidiial. — In the illus- tration we ha\e assumed that each l)nyer desires hut one unit of the article foi- sale. With many classes of u'oods, each huyer may desire niorc tlian one unit, {•ii>ars for instance. Some wealthy men miiiht <4i\c a dollar if they had to for one ci^ar a day l)ut they would not yive so much for a second. l-"rom this t'act we de!M\e the ""law of satiety," tiiat v\L'vy unit of a com- modity consumed yields successively less satisfaction and has less utility to the consumer than its predeces- soi'. 'I'he demand of any one consun\ei' for units of a ^ixon commodity w ithin a i>iven period may i/c I'cpre- sented hv the follow inj'- diauram: I ;^ .*l.nn_ .•)0 H-^ .(XI 1 1— 1 1, -'. ;}, 4, 5, 6th •ifTiir To make a chart showinn" the demand t'or cii^ars, it ^V()!!!d he ! !', ('('SS.! rV !•> CO.'Mh!!!'.' ! h.' • ■■h:!!'!'- !''-'n!"'.'Se!!t !!! "' the demand of each coiisumei". Snpj)ose for the sake of sinij)le illustration tilers were one huiuhed consumers 01 .M()M;v AM) i;\\Ki\(; "'' ^''-'""^ '" '■'"• '"•"•l^(l. Ill,, .Hti, -111 .MIC liun.liv.l. Supimsc ilu. , Makers ,.r ll.is particular (|ual,lv ..r n..ar '•""'- with the Indians had tjie nie'-it of hein^ imix-ssihle to counterfeit. 'I'he steady demand foi' lieaver skins for manufai urinu' into iiats in l-jiuland ua\ e them a n ery stahle value amono' the col- onists, and they earl\' aeiiuii'cd the .(uality (d" exchan^^e- ahility in addition to their ordinary utih'y. When a ti'ihe' passed from the hunting' to the pastoral sta,u'e of cultural development, it was natural ll.at they sliould adopt a coiumodity for money v hich existed in ureater and more constani sup])!y th.an the products iA' the chase. Thus we lind amo'i^' the ancii'nt Ilehnws and Ai'al»s that cattle were used tor the jiurpo-f. However, it is d(.uniful whethe'- tl.ey attained any ,ureat circulation as a mediiun of exchanm': it is iiiorc lik- ly that they i)cr- irii.ed the function (>[' a measure of value. In tlie on hook of Cenesis we constantly read staie-uctit'^ of tiie v.-ealtli of indi\iduals as measured in the si/e of tlieir '.iy, -^"'m:v AM) irwK.x,; . , '■ '""* •■""' lis |'':'^;;:::;:•:;;•^::;:r■^^ i:\()i.r'i'i()N OF I'Hi: mkdum uf fxciia.n(.k 'm l((l)acc-() {•iii'iciK y ill \"ir<4iiiia reveals a <^reat many of" i the priMeii)le.s iiiidei-lyiiio- the seienee oi' money. The J story is very well told l)y Mr. Iloraee White ii, his i)ook. 'i "Moiuy and lianking": In Hity at) act was passed forhiildiii^- tlic iiiakiii;;- of loiitracts |)ay'il)le in inomy. tlnis vlrtnallv niaklnii,' ti)i)acc() the soir cur iiiicy. 'i he Act of KJl'i wa^ repealed in 1().")(). Init nearlv all the trad In;;' in tile j)i'()\ince conlii. i.d Id hi- done with tnhacco a-- the nil ilinin of exchange. In \()':iS the price of tohacco in silver had hei ii H-. (id per pDUnil in \'ir;;'inia. Tlie cidtixation !n< i-( a-((i sn rapidiv that in 1():>1 the price had t'alli ii Id (id. In lirdrr t.. rai-e the price. >ti p^ Were taken to r'^lrict tiie ainonni i;rn\\n and In inij)i'<)\(' the (luality. The rl;;'ht to cidlivate tohacco \\a> riNti'icted to ] M)() jilaid- pi r poll. Carpentir- and oHnr niech.inic- uere not J aiio\\ed to plant toh.icco "or do ;in\' (itiier «oik in the ^ronnd." ; 'I'hesi' iiiea-llle-- Ucre i neti'i <'t i \ ( . 'I'hc jiric; continued to t'.tll. In l(i;5!) it was oid\ ;>d. It uas nou en.icled tiiat halt' of the H'ood ;uid all of th( had should !)•■ de>trc\ed. .and Ih.al there- (tt.r II creditor^ -hould accept M' Hi. f(U- 100; Ih.it the crop of KiKi -hoidd not he ^oiii for ir-.> th.in I'^d.. nor that in Kill lor le>s til an !,J>. per pound, under jun.dty of fortViiine of tl uholeci'op. 'I'hi> la\v w.i> inetitctiial, a-- the pri \ iou^ om ^ had heeii, hut it cau^((l much injustice Iti'tueen i!''hlor^ .and ci'((iil(U'> hy ImpauMii^' the ohhi^ation of i\i~tuiij;- coiit i-.act^. In Hi!.") to- hacco was worth oiil\ 1 ' .d ,ind in l ot ~uppi\ !■> not ,a e the prici . 'i'hi> tein- pDi'jiry susjH'Hsion of pi.anlui;^ in.idi necossarv some other mode ,..._, ,,,^ • t(V«'lttl)t'^lt « n;uti (I ( I lit I I M f I I I j f I t I f t li 40 M'lM.v AM) 15.\.\Ki.\(, ''"'^ ■""' i"'i^'i'' 'M- c.ii;,,., ,i,„. ••;„ .1, , . ^T;^r' '-- ^-:M..:^:';;::::■ ;::,::- 'II U)S:i ,ui ( \tr:i(>r,|,narv .,,;,*• 'II'' inu pn.-,. ,,f inlruv,, M , "" ,.^, ,. ' . ' ""■'""• -^'■"i> I"'.,, I,. .,„,„,! ,,,,,„„„ ,.„. ;;:;:;:;:.'" rirr'"''' '■■""- -■ '-'■ ■■■-- scKr. to--, III, ,• ,,||,i „, pl.iiiK uli, r, v,.j- c, I "M"-l u... ,i.,t or.int,..,. tli.v I, ImikIwI tlifiii ;' *'"""^l''l'"-»n.;rv.l,.>,n.vin;;.t.,|,,..,vo ^: A,.,. H.M.H:r, ::,!,: :;'T';'^'';'\'''''''''''' ::;; ■:';■;■'"•;' :■■""> "I'" I -^.in,„, „:,:::; -'I--'"- Ml,,.. I, , ■■;■'"'■';":•' ■■•■■■-.I ■ -...i 1,1 „, ;;■;"«,' ■•''' ■■ >■ in.t,.i.-,,^„ >'irt I r (leal ),_ " •T- .111(1 H' ii.a- t:..:i!:r'- ""■ >•'- '>- ■- '"■''■'"'^ li"l'-. .mil Ii.,. Tl„. t„lMr,., Hie IVai III i( re i"- i'( liic (IIn- ' ".^ """""- l'.nHl..uu|., nu- ,1, ,„„,^, "■'■" ill III'' U.Uv||,,|,.r, ua, ,, ", " '''— li'iiiU''. Til,. ,„|,a,v„ nn,,. .,,,. ,„,,.; III'"!' .1 i'< l.iii_\. In ||' i!"t' -."" ".!> Illlro- '■> I .iiMilli, 1- \arii t \ ,,|' , I' II l"-\ . (all, ,1 ••,■,, " -' "' IV l>MI,(l cask li, inn In 111(1, , I ami '"■ I'"-'" Hi."' 'n-k^ ni- f„|.a.,„. .a. '" '"■"•'^^ ^p.(i(„.| n„ 111,, ,„,!,,_ Ml! Us, iiiilst I "■ '"•"'' "I f'''"ll III st;,(|n..- f|„ ::;„;:;",'■'• \ '■'-■:■■'• '-■>. ■„:■; '^^'"''•'' "M"'!-. liKi,!. r,„- MH-n. V ....i: •»'J«tiiii ill X. \' K r.\()i.r'ri()N or 'iiii: mi.dicm oi' i:x( iia\(.i: ii V (Hit ()(■ iiN for a ( Ti asiii^- 'l tlifiii tiiliacco nil- III, if ■|( (luM- l.lt fliiii- ImI Ilia! II a I Mil 1 1 <'!■- and tile iia- i--ii( il nt aiiij « Ik re lir (li>- IKltcS, I- \\,-(s iililc I•^ ■ ^^c|■( n aii\ . Ill ml ID . (acli ■ ilitv. 4.>. sMn „i ,,/,,. „„^^ „,. ,,_^.^^ ^1^^, ^_^^ . _ ''''•'Y'-- i..vn elin.inatcd hy tlH. use of H.etallic coins. '"' '••"•■'• '•>. '"■ "- •"• --«lit. Tlu.re is one <,ualitv '■-•--Oneh n.,dlic currencies fail to possei. tha -;t.-''"l v'.ivahic. 'Ihewhoh cs.ion of M.e stand- "':'^'"""' ""■ "'"''■ -'.Iroversy ov< r sih,,- and ..oM ansos ..ut ol this charactenstic lack of stahditv of . due ;''''7''''<' -''-'' 7 siull disc,. sat len.,h-p..,,,K.; ""■'"'•■'In-.lto! tins process of, . vol,. tioni, .,...,.. I ,. , Hi iiioncv. the '' ^-"'^"■'•''' "i i'.e unlit an.i the extension of the i,\()i.i'i'i()\ ()!' 'iin: Mi'.DiiM ()!' I'.xcn.wci: ni iiilorni- ■ir ■ <|iial- I't'i'tiiiii. ^vly oil (-* (|iial- is, the \t* and turr ()!• V oilier it par- ic'k of lie list' IVit or \c old |iiiri- y for ■fciicy ■(■ ini- riora- trd as II l)(- lility. ts in ■<»iiis. ality. tli;it aiid- H'old ;duc. iilly. . tl"..' • the ii.; i)[' foiiiiiiodilies ,)o.ss(.'ssiii!4' more of IIksc (Usirahle ijiialities, was llir iiiii\crsal use of the metals as moiuy. i!( uinniii^" witli the eommoiier \arieties of nutals like lii■ ''"-'■!'■. '"''I .-ukI silver- ''•'\' '••"•«•(■ value in sinal! I.nll. ..in , .. . "" •' H ^■licapriiss (.r siK..,. '"^''^ '•""- ^''"'""'A^l' tlu. inm.asin:. I I , " '" '^^ ;i"aii.i()iinnMl a 41 s a i:\Ul. ITION OF Till: STANDAKl) OF \.\l,li: K 'lie liis- law of nil the tr liad settled ;ils /'()!• I ^reat laimiit lul the lleni ;i lost of ' statr ) that icil ill llie ;| , nietid to its ■ah!e, j»ar- soine .il\cr aerl- se ill I'hev siljM IS a inoiiev metal within I'eeent yeai's. 'I'hise metals are peeiiliai'ly adajjted to the |)roeess of eoinaye. arid eaj)a- hk ol' l)eii!Li' eliaiit>ed in t'onii. si/e and sliapi' without a ^|)eeially ditlieiilt prot-ess of nianul'acturinu'. To a\ oid the di\ ision of sil\ er and <4old into (juantitics so siiiall as to he inipi'at-tieaitle in handling', the baser metals aic ^^cnei'ally used for eoiiis of niiiior \alne where till' defect of small \ahie in lariic hulk does not a{)j)ly. .")■_'. I'Idlitiii III niisiu-ci ssfiil as iiniiu//. Of the moi'e e\pensi\e metals |)latiiuim is tln' only one . liieh has lirri! tried as money. In 18'JS the Hnssian (Government, which owned the principal platiimn. mines. I)e it easily (list iii'^iiishahje on account of its weight. I "urthennore it oxidizes \ cry slowly. 'I'he experi- iiKiit. howe\ ci'. I'cxcaled si'\fral fatal ohjictions to its use as com. 'I'lu re is no ureat amount of it in use in commerce, so that the \alue of it is lilvcly to he \ cry unstahle. Heeause of its extremely lii<>li melting ])oint. Ihe cost of maiiii i'aeturiii!' the coins was wvy oTcat, and it coidd not he ea^dx con\trted from hullion to coin and from coin to hullion, a feature which reiidi'ivs i>'('ld and siUer \ei-y siiitahk' for money. Thcsi.' objections in- duced the Russian (ioNcinment to abandon the cx[)eri- II Mil I in IHl."). .").'{. (Ut'jiciidiis f( <^()U1 (t>i(l silx'cr. - (\n\{\ and sihi'r III hullion form arc b\ no nuans the ideal monev. Thev are dillicult to identify at sinht without the use of tcst.s, \\hieli ;ii( too ( laliorate for oi'dinar\' use. so that it is ras\ lo eoumei'l en liieiii. 1 iic\ aiso are an cetcu i)\ w ear and the (|uestion of loss of weii^ht in handling has 46 ^"'M:^ AM) I{.\\KI\(; ;'^'i'nc.slHvn.s.nousn,K.. Inn.: "t finics rsjKvfallv, ])rnhh,n. or ., sen. "' "■^■■■'^^■'' "">"c'tarv ^ .MMnnsnahnv. asuasilinst,.alc.,lhvth; '" •^"^<' ayifalion ( Hr in.' tlic r.vf * .>». ro/,/.,.;<, ',>,,^. ,i,,^j tuo.Ic.f,,. ^"^'••I'ln'ilitv to u(.,r .,n,l -^ -';'•""*". I.e.. f|„ ;•"■'■'■"""■ I" " ''■■•i.,„ ,„,,„ I,, , ,,„;".,,,'■': "'',' •' 'l'"iililv ,.r „iil-,l will ., ' ■•tanip„,„ „| ■rni-i:..„i„„, ,., ,,i- ,,■' ''■''"'"' ""«•'"■''«■■ ^'-'i-' '-,„,„ 1 J;;:, ,:::';: ';','"'-;: ^IVUiiia. in nr.l.T t„ r-.cil.>.,h. ' '"'"' "' "■■■?:'■':! ^' -I-' ■H.,,H,,,i'-;;:::;:::; '™'''"'' •'■I- -'K'ncv (./■ ,■(./■);«- 'I'l :. '■'"";-■■ ■'!'"■ "•■'■"<■ "!• till' K„„ii,h ,„ l''-('ncli con. liviv dl,,. i.',.,,. i , "'' "''' I '"'• "'-''"•■•'ted ll.at tluv uVrc '";;- ^'-H..!:;s.':.,::,i;::::i'::;:x.'"""'"'''-^ '« ^^.is pn.I.ni.lv un[ In,,,,. |,,.,np<. H •' ^•l"il<' lil>-lv that l|„ |,.s , ''>"'"'ses. it "—.I l"i.';::/"'::r;;r:;:;:;':;-'"™' ' Hie iiKlal or sul). "■••!<•(■( tni, 11 III,, v).,, I ■- "i»-i.u or suD- cn'ciiiiiv. n( II,;. I . ' • ""'t"'i'>i<-'. I () ,,,,,,.,, , ■,; I'i'^H, .(•(.. rile .stamp in,.,,, t|,. cir eoiii \ %< n. we unit lent H K'Cfl Ul). U'C. To i:\()i.ri'i()N oi riir. standaih) or ^.\LI i: t: so as to make dilHcult the iihstractiou of any ^)ortion ol' it, and besides to inserihe on \hv eoin the name ol" the person eertiCyin^' the wein'ht. 'I'o |)revi'nt the wearing- away of tlie inetah it heeanie enstoinary to mix in the coin some liarder metal, ea'ded alloy. Auain this eon- venient (k'\ iee was ahnsed. and it was fonnd prolitahle to inli-odnee into the coin a i>Teatei- amonnl of alloy than was enstomai-y. 'rheren|)on it heeanie neeessai'y to in- dicate in some way the fineness of the metal. .■)»;. Jii'qiiiri'iiicnls of ^ood ci)iu(i;i^c. — At this stage of coinage several considerations had to he observed: It was necessary that the stamp njjon the coin shonld cer- tir\- that there was a certain amonnt of metal of a cer- tain fineness in tiu' coin, that none of the metal had been abstracted after the stajn|)ing of the piece, that the (K\ ice co\ ci' the whole face of the coin, that it be ;^'nar- antced b\ some reliable j)erson. and that it shonld be diflicnlt to connteifcit. The i^reat a(lvanta.,. ' ' : ""■",' '" ''"I"-'- "■.■.>!„ „, H„,,„,^,- ll„.v 1 , I """■'."-I""' ■■•'■ ^y --,i„« and , ,i : :' T '--"■'■"'"■s«"v..,,,,.la,,,ly,a,lk..l.,,,tt„nak:r,.,, -;<'Kli ..I,. |„„«, „,|,„|, „.,„_,.,,^,_| j.„.'',,„|„„. .■ «i■<■" l,«hU.,. an,l lio.,,,,,, nntil. in ia-,2. tlu.pl™ , .-.7. A/,,,,,/,,,,, /■ ;.„/„,...„,■,, ,„ ,|,i, „i .^1"H,,.,I,I,. M,l,,,.,, ,,r„K.|aMi..„,n,,..vr,,,n,|.c. s, ;r I'",'"',"' ''^''""•'i""-^anK.di„n,nr ,,,!,„ :,'.'' ••■-;'^«.-Mnn„.s,a.vnn»,v. .,.„,,,,,,,;,,,,, "'"■ "" 'I""'""' "I H,c Innrtiun nf „„.|..ii:, "".""■:\^'^ •■' ^'^ -■•l"|-valM. invn|v,.s,,nd..d"!V: |)niici|)lfs. * <''ircKiu 15y a slan.iani or vahuMv. nu-an tlu- ,:sr of a met-,1 .s a (iic.'ism-.. f',.,. )iw 1.. ,. .. .. 'I liituu as .. , ' '" '"' 'i'!<-T coniniodities Tfw. i;\()Lrri(!" oi jiii .^^.\^l)Al{l) of \aui; r.) Ill- i I stiiiitlifd is stal)ility <»!' xaliic. Since Naluf is tlic result of a(l_justii ''lit iR'twcTii supply and (kiiiaiKJ. it is ()l)\i()us tliat our slaiuiai'd nit'tal must not l>t' suh'ix-t to excessive tlnctuatiiins in eitlici- of tiiest' jjai'ticulars. Tlie prin- cipal nion( tai'v ))ii'l»i( ins !)!' the past centui'v lia\ e arisen out ol' conti'o\ eisies rcyardinu' IIk' standard. In ancient times Itotli i^old and siher were used as a standard, and no dillicully rose tlieicl'roi'i. pi'incipally because there were no t^ri'at clian^fs in the supply ol' !'i(se II ':iis a, id I)ecause trade was so pom-ly de\t'loped that di\. r^cncies in values were not impnrtant enoUi;h to create serious inconveniences. It is only in communi- 'it> where industry ami commerce arc hi<^hly organi/A-d t!i:it small chan;i,-es in the measure of \alue are iiotii'c- ahle. The case is similar to that of enes. <>'old l»ecame so scarce that sil- \vv was })rac-ticall\' the only coinage, and so the Vai- ropean nations v\( : on a silver standard. The i'all in the value ol' silver ai)out the time of the discovery of America created a demand foi' coins oi' "^I'cater value in small hulk, and as there v\ s ;i uiciitir production of _U<)1d at this time, the use of u'ol I'oins to.u-ether with the silver hecaine more common. Tt is impossihlc to understand tile intricacies of the \ II I 50 M(>\i^ \\i) i{\\Kr\(i .sf-'iiidard .|iKstin!, iiitil ^u k,i,.u jiisl |,n-.\ III, vainrs r.f tlir coifis nvc (l.t'/n.ii.K.I. n,,t|, silv.r jmh) -,.|.1 ;,,-,. n^,! to .s;idi ;,.; rxtrnt in the .iris lli;.t tluir .nine is (Ktcr- iiiiiK-n before. .Jew- elers and other i)ersons wishing to use silver in their business will melt up silver eoms instead of purciiasin.,^ the bullion at the hi-lu r ))riee in the eoina.ue. l^jide"- these conditions, peojjle wr„i|d hemn to disenminate he- tueen silver and .uold eoins. selling- the silver coins to the jewelers at the premium whieh would i),-oI)abK- be of- fered for them. The (Government would be unable to H'ct silver for coina-e purposes unless it ,yave a much larger sum in <.(,|,| |',„. jt. ;,,i(l if the C Government simplv ^ave hack the silver in the form of coins, these coijis would (piickly retire from circulation. oO. Grrsha Ill's Latc.^Thls principle is called (Gres- ham's Law. named from an ollicial in the reiou „f Queen Kli/aheth, who first observed this tendeircy of people to discriminate between two coins of the same nominal value. The simplest statement of this law is that the cheaper money tends t.) drive out the dearer, that is to say. when the peo|)!e for any reas<.n beoin lo discriminate between two coina;«-es. they will invaHably l)ay out the inferior and will hoard the better, thus re- iuo\in<4- it from circulation. The only remedy for this eonditioii w(iul(l be for the i:\()i r'iit.N ()V Till; s'iandakd oi" \.\i,n-: [Viui- I mints to cnnslaiillv niter tlic aiiioiirit of nittal in tlir I'oius t(i coriTspdiitl to tlnir coiiiiiMMjity \altic in the mar- ket. (Jold ar.d sil\er are so easily transuofted I'rom one (■(UMitry ♦<> anotlier that ehan^'es in theli- \alu',' at an\' ['.iiticnlar jilaee will (jniekly spixad thron^hont Ihi coni- intreial world. I'or ixai . iC ;i new sihc-r mine is diseoiei'cd in Son''! Ameriea, the inereased .supply oC >il\er at tl'.at place will hiwei- its \alne: tlic producers will oirer it on easier an easiei- tei'ins in ex(iiap.<''c I'or i^old or anytliinf.^' else oj' valne. Silver w ill ayain l;egin to he exported, for it will eommaiid a hi/^her 'j)riec ahroad than at home, hot the I'esnit of thns increasin' with a mat- li V which they do not uniler.itand, they souuht io deal with Ihc symptcMus rather than the cause of tlie trouhle. To this 'lid they passed hr.\s foi-hiddin^- irade in llic liiccious metals. 'I'luy placed ohstaeles in the wav of export ,".nd import, 'i'hey made )neltin<4' th.e eoms a Ci'innn.'ll ofVcll'a- \ >.: iv ii>-.iiMi \>Itl) mwrii'iit ifir> l-i.^c l^i' \h this character, they wire im])o^sihle of exeeut Acre constantK' (\aded. lOtl, 111 id 1 ^I()^]:^ wd hankinc; H. iViiothci' clause was now added that no more il\er should he coined at the mint for prixate ])ersons. CiL'. Adoplioii uf siii^lt' :^<}l(l slduddid iniiiitciilioiKil. —The si^nificauct' ot' this ici^islatioii was not j)t'i'cei\('d at the time. It had not ])vv\\ the intention of Parlia- iiiciit to estahlisli the sinolc nojd standard. The (jues- fion of statidard was not undci' consideration at all. What Parliament did in 1774 was: (1) to put "old coin in a state of perfection hy recoinin^' the defective pieces and making" liiiht coins una\ailahlc in paynunts !h( I'caftei': ( '_' ) lo limit the Kiial-tendta- faculty of the siUer money theti in circuiation. The mint \\as still iipt'n, and anyhody could ha\e siher hullion I'oincd into money of full wciyjit and full Ici^a! iendri'. jiut since siKcr was uiidcr\aluc(l at the I'atio "A' 1 .") 1 ."i. nohodv would take it to the mint. Thus all the conditions of the sini^lc uold standard were in pi'actical opeiation without any fixed intention of I'ailiamt nt to hring it ahout. or any know Icd^^c that it had heen doni'. it was noticed. l)owc\(i\ that 'he inconMiiic ncc s of a ^hiftiiii^' i';iti(t hav small ones. AithcMiuh tii' siKci" coins were dc- lici( lit in weight, thcv answered tin purpose s of small ilianLtc. After the experience of a (|uai'tcr of a cen- liiry. I'ai'iiamt nt and |)eoplt v.'.yr com inccil that the .\ct of 177 ^. although adopted as a temporary ?ucasure, oiil;Ii1 to he made pi I'manetil. .\ccordin;4ly it was iikmIc so ii\ I7!M>. ^ ( t it was not until ISlti ih;d the true | liIlos()ph\' id' the sfip w;is w--'l t H. o,,|.| c-oiM ..(• tiK. renin., whc, of r„ll .vci.-ht .^HouM he i nil K,,.alU.n.ln- and should Ik. .oincdn^^^^ Pnvac p.-rsons tn any an.onnt. and thai s|h,,. ,,,in ■si'"uhi not Ih. !.,uJ undn- lor n.on- than lOs. in one l'-\vnK nt. ..nd shonld h,- .oin.d onlv on oonnnnrnt -u- ;•''''''^•^,.KhonldlK■^•dncvd,..^v,.i.ht.;,H■rcv.nt. This i-v. wind, .stahhshnl th. sinok. .old standard, rcn.ains in toi'ci' to thc' present day. J^--''''^tohMlK.sino.;daro.oodror!nnrorK,,o.h,nd o hinnd.r upon or have, thrnst npon h.r , institu- ^">ns uhu.h oth.r n,untri..s an,UMv oulv' after nuu-h ->"sn<>us Hlor, „„, ,,,,,,aps revolution." l^.side. the Kold standard a ureal many ,.xcvlk,,t iV.atuns of ...ov- enmu.nt the. dual houses or IVuhauKn.. .h. nspon- -l>.l.ty.dthe.(;ah,n,.tlothe.ConMnons.r..puhhe-an'ov- ";'7"' ;'"''•■•''-'•'''•'-' •"'•''nionare-hy.e.t...u.i,hMK. (■it'.d on this poiiil. •'•iyl/////,v,v. Tlu. key to !h.. nnderstandin... of the com|.le.x pn,hK,,s o, ,h,. ..and irds i. . He.ar ..one-e.ption "" "iin',n.orn.i„auv ,.u.d oflh.. Inllu-ne,. of the """ts upon values of, he pr-e.-onsnutals. .V unni is a '' , , ^^■'"■'■•' *•*■'•'•••'" '•' 'i"i<*' -in.nlilies of th-. previous "'y'^'l^ ;;••<• stamped with a deviee or inscTiption. indi- <'^"'"i,- the ..xaet,,uantily of metal in them. .\ , hefor.. "'•"""•"■''• "- •■••"•li'-t inse-ription^ .ere literal stat,- ';"'";';''""■"'■'-''*"'■""• ""■'••'I ••""laiiud d.ivm-the '■'■'-'''' '""""' ^^'-'^ ••' l"""id of silver, the Famhsh I-""v.n pennyuei^h, ..r.,K,r. "I he sole runel,.:;, ..f ""■."""';^-''^'"i'" "" "letal In.oa ,orm mor,. eon- ^";","' ';"• '•"■'•"'•"-". II .(r.el.d the v.lne of the ''"'''^""'> ^'■'■^"•^'•^"'--'"npinu.inereasedlh.irnlii,. '■ "^ V'"'''"''""-*^""' '•'■•^^'••1^'-' add, ll.nal dm, and for tli(.m. '''''"1""""'^ ""•••''^ ''■•i^'M Miarkel v-dueexaelK the AOLI'I'ION Ol' IMir. STANDAUl) OF VAI.I 1. r,r, line as aiiv otlic- coiruuHimts itii aiut 11 ns mar ket value llia-tuates iccoi-dinu' to ti.c laws ol" sup])!)' and dcniand. \\'luii tlicre is oidv one nutal in use as money the 11 uc- !l I ts market value can )th hv measured only by Th Illation^ IIk' rise and fall of priees oT other tlini<>s. | |r; name •■dollar;' 'iMunid sterling/" ■'i'rane/' -mark." ete., are simplv terms in(lieatin<4' weight, not value. The name •dollar" tor example is merely another name I'or a eer- tain definite weight of o(,ld. i. c. -J.'i.-J-J orains of pure nold. A eonfusion of thought arises heeause the values (d' everythinj^- else ai'e indieated by eomi)aiison with the dollar ol' gold, r.eeausc tlu- amount of -^old i.i the dol- lai' nevei- .halves ixeept In le.uislatix <• enaetment. peo- ple fome U) tnink of the \alue ol' ,!^'old as heino' iixrd and unehangino'. In a later chapter on the relation he- twicn oold and priees. we shall work out this idea more (.xhaustixily. (i-l-. Liual tciKhr. In the Middle .\gcs. wlun there Wire a ;;rtrd \alue. Legal tender means any medium of ex- change which m:iy he ten !( red in paxinent of deht. and \Uiieli must lie rec(i -MoM;^ AM) |{.\\KI\(; ;'P f'"'"^^'"'ilH'.Kn.ur..u.t,nvor;,..vdrvnr|>latror I'^'y^^ •■■•;• -^i-H.'tivrr.huvdth<.anH.n,tornH.talin th.c.^^^ ^'tt^;".l.tc. ///>/o/7/ o/ roina::r In the Cnihd Sfatfs.-Thv l).stnryo|MheeniMa.enr.ohlaM.l.,!ve,.inthel',nte,I ^•^'tes.soneorth.. Minst mst n.et ive ilh.st rat ions of the I Jaws wh.eh uovern the tinetnations „. .ah,e oC th. pre- I -.ns nntals. The (ir.t se<.,H.tary of the treasnrv 'va^ I - '■■^••""I •''■^•'•-f'Hoaplanlnran.on. .tary an "'"'-•"''"■i.s. The p„u..r.iK.n toC-on.,!ess "'. "" ^""-^'''"l-n of reuuh.finn thr rah.e of Coreion «""is uas most nnpoHant at that time h-eause of the Ai-reat variety I„ .-irenkation. It nas nee.ssarv to have -;nie anthonlall^.. vahiation In onh.- that pavments ""-''' '-•"■"I' ^^itlHHit n-imrinoth. partus to eomr to .•li^rcenu nt as lo the preeisr nirans of pavmc nt '•"i/wrv/..//o„/.sv7.v//o,.o/r/. /.--../. 'it was part of tlic- pkn, of 1 1;nniIlon to .stahhsh an ( •ml, ,1 Stat, s mint ■so that th, . .m.i.vmi.hl he snpph. ,1 u 1th an a.h .mat." '"""""' '"■ ''"""1 States eoiMs in the shortest possible '"'"■• ••""! I!'"^ -• .■|^^.■.y uith the eonCnsioM of th,. mis.rl- ''";-'' prices in that standard. The opening;' of tiie mints to the coinau^e of silver and Li'old at the ratio 1.') to 1 .iieant the free coinage ot' hotli metals. T'iie mint stood ready to accept ino- the metal, char^in^' him a \ei'} small fee for tl>e alloys used to hardrii the coins. (•T 1 11(1 Hide// of the ratio (iiid ils cflUls. — The plan (lid not work ■ iit as Hamilton had intended. In the Mrst placi' the ratio of 1.) to 1 had ceased to re|)i'esent ihe market ratio, when the mint was finally I'cady for coina<,e al out two oi- three years later. According' to 'he u'reat Kuropean authority on the market values of the ,irecious metals. Soethecr. the actual market I'atios were as follows: l.)..'J7 to 1 in 17!>1-, 1 ')..">•') to 1 in 17i>.'). l.).*;.") to 1 in 17'»<;. l.").4.| to 1 in 17!>7, I.").")lt to 1 in 17!>H. 1.").74 to I in 17i>'.>, l.).tlK to 1 in IHOO. and l.).4() to 1 in IHOl. Till se chan;.ies in the market ratio indi- cated that the tciKlcncy of siher with. I'cspi'ct toxoid was downward. I'nder these circumstances noliody would he so fool- ish as to take j.'')l(i to the mint to he coined. It was !iiu(! more pi'o.i ,d)li' to take that <4'old and pin-i'hasc siUer \'.ith it in the market, and tlu'n to take the silvir to the mint and have it coined into uiore dollars than the !4i>ld would jia\e made, and each eajiahh of purchasino- the same amount of conimodities as a ^old dollar. To make this ])roposition as cleai- as possihlc, li I us tidxc a concrete examjilc. Suppose a dcalir in hrdlion has one pound of ^'old. it he wishes to convert it into a means of |)aymcnt. he .')S •MONKV VM) IJANKINc; till may do one ol' two tl.inus; first, 1r. may take it to tiic mint ami liavc it coiiitd into approxiiiiattly -JM) dollars: second, he may vwhiuv^v the o(,|,l hulli,,,, for silver bul- lion in the Kuropean market. I f the market ratio hap- pens to he ir,l . at this time, he will ^et i,, exehan-e 1.51 .. pounds of silver. This silver he may take to the mint and have it eoined into approximately •_>(;() dollars, eaeh or whieh is just as u,„„l as any no|,l a,,!!;,,. f„i. tl,e j„„.. pose of trade. ( 'nder these eireumstanees, whv should anybody take ,<.„1,1 to the mint when there were always dealers ^^hn ^^vvc eaoe,- to make the profit whieh eould Ik- had by purehasino- his u,,l,l h„||ioM for silver dollars, t'xportino- the o,.],! t„ i,,,,. c,,,,,-^,, ^:|^.^.,._ .,,j^, ^j^^^^^ j^.^^._ in- the imported silver eoined in order to buv more <.(,hl '"'Ihon^ Here we have an endless ehain, automaticvdiv causinu- an exj^ort of n,,l,l and an import of silver. I 'n*- der these eireumstanees no ^,,1,1 „as eoined, „f t,„„.se. •'•' ve,-y extensive t,-a,h.. both eoins pasMul at their '^•'•^-alue without anvd,MTi„„„ation SIhwv.I t,ade,-s i.\()!.i rio.N OF rm. siandaud oi- \Ai.ri: m- I Inuntl, however, tliat they could make a |)rotil: exportiiin- the new Ignited Stales silver dollai's. e\ehani^iii<^- tlieiii ill the West Indies i'or tlie hea\ ier Spanish dollars, nielt- iiio- these liea\ier dollars into hullioii. itnn^in^' the liUi- lioii to the Ciiited Stales and ha\ iii^' it eoined into more than the oi'i^inal niimher ol' dollars. When It was discovered that the eoinaoe of silver dollars was simi)ly adding- to the profit ol' hiillion (k-ders instead of sni)plyin,u- the country w ith currency. President JeHVrson suspended the coina«ie of the siher ilollar in IHO*!. 'I'his unsatisfactory state of the metallic ciirreney of the country was not serious heeause of the almost imixersal use of j)aper money at that time. I'l III IMMiSS (ir M \I1KIT Ii\Tl(l HriUIKN del I) AM) Slivill.' ^,,ll■. Uatiii. Year. Italio. Viar. Ratio. i.).n 15.7!) 1.>..>J '^ I -111. l-ii.) * iMMi iMiT lj.l;{ 4 1-(W Ki.OS I ISO!) !.>.!)(! i I- 1 (I l.VTT l-ll 1")..".;! i-i." Hi. II |sl;{ iti..',-, jxU Ij.ol l-l.> l."...'() l>lti 1.5. -'8 i-«i7 i.vn isiH l.j.:ij isii) i:,.:« |s.>() lj.(i.' Is.>l l.-,.!)j IS.'.' i.vso |H.':{ i.-,.sv Kn ij.s.' !».'.•) I,V*(» is.'i; i,-,.7(i ls.'7 l.>.7l is.'rt to ix.'<). . . . rv7s I C'lmipil.'il li\ tlu Dm is;$(i. isil . iKi.'. is:t;{. IKU. 1.V8-3 1.>.7.' l,"..7:i 1 ■, !i;i l.-..T.{ 1S:{.; I.).N) is;{() i"..7.' IHU7 I "..Si isss i,-,.s,, |s;i!) to I-' ID I. ■..(!.' Isu 1 "..7il lsl.> 1 VS7 isi:} I ■..!•;! ISU li.K'. IHIJ IV!!.' ISKI I.!»ll isn l.i.hO ISIH l.).H,> ISl!) 15.78 ls.',() l.i.70 iH,-.i \r,.i(> IH.).' 1.5.j<» lH.-.:{ iv!;i 1S.U... iv.i:! lH.'.j... . \;.:\H la-io. . . . i,',.:w is;,7 . . l.V.'7 lH,Jrt l.'i.nfi ]>•:)<) i:..i'i ISliO 1 '>..".) Isijl IV.'ii ls(i.' i.».;!.< iMi;{ 1.J.S7 isill 1.VH7 ih(i.; ivn is(it> i;, i,i lb<>7 l.»..i7 lS(iS 1 v.")!! iHiiSj 1 ■, i;(i 1S70 l.)..W \>:\ i"...'.7 IsTJ l."i.(i,i |s7:{ 1,>.!».' ls7t 1().17 l!-T.> Ki.fiJ ls7 .'1 ISS.' IS.iJ lss:i 18.(i5 1H8^... lM.(i3 188,'. 1!).3!) 188(i .'0.7;{ til. lititecl .'■■ittte.s Mint. i 60 •M('M;\- AM) JJANKiXc 1 .SSM . lh!):{. it.iii I eji r. -M.l.i ls;i|. -'l.!)U I >!).-,. l!).i; 1W)7 -':{.7J I -'(j.l9 1 ^:>i h!»S :{ 1 . ;{.-..( h!)i» lii.: !)00 3.5.: Katio. ^car • '.i.'.-'ii'i i)i(i|. -'0 \nin. I't i'M>:>. III. Kalii . . 3+.()H . :i:>.7o . :io.,u \\;is, thertf ("///.L' < "f ratio to /6\-/.— The .11 th ore. oil ;i stiift silver I (i I monetai-v svsttu )a.si.s diiriiio' I his nerio,!. '^\i^nld iK.v.no- l,,,n ,.x-,.ort.,!. hoanK.I or ,l,\ertcd into the- arts. In is.'U. C L'( Ivtl I*-' e'cnditioM. irdiict'd tli •"•^■IVSS. Ml ;,,| attfiiipt I, ) rtiii- 1 roiii 24.7.) grains to 'J,'}. 22 e wc'iulit ,,[■ ti If m .1(1 (to! rt'j)resciiti(I a ratio of api ,S-'''";llllS (.r piHT n(,i,|. 'I'l II' nieicia 1 rat niijit rat ncaily conrcl. j could I)a\c 'o m \W.n was 1.3.T.'i to ], )f<'\iniat(ly K; to 1. Ti R' coni- 'o iMitiJ I'ortv vcai-s lat (T, io\\ ex CIV •ttl "oi- did it nacli iln ^1 was pi'ohahK- af ;is aii\- ari)iti It w Hfii settled ii|ioii ^^('11. ill fact, ii aiy ratio wjiicl, ■liiiiietallivnr' li„xv iii,.frn\- attempt must \)v \i value hetuccn t\\() sue! a siiinif coimtrv a rat lo o \\liieh ha\(' uni\-i-rsal titilit I (•on!m..ditiVs as o-,,|d and sil \'er, as o()l,| ^vas d i'i\eii out ol' (' too low, so after IH.'U sih •■""' a world market. Just "I'latioii wJKi, the rat lo was was too hii'Ii. ^\as drum out l)cfanM' It "t was at the mint, and tl 'ilvrr was worth n IO!-r ;|. nil llioii tl lan a i>'o Id iiasis. In IH.'M the rat If eoiiiitry soon JMiind its.lf on 1. hut the diil lo was eli;in^<(| to l.").!tS t () tVct. '■••<"ee was so sJiM-|,t that it |,a,l little. .-f- 70. Lc^ol t( //(/(/• ,,rl (.old •v ('rtiit(\'J j la per .s/,7;/^/^/,v/___ '":'"'""" •""'"•'li-l.'n.dard,iiitllth,.|ro:.,| tender »<-ts of IHO-J is<;;j. The (jrst of ll I'el lese icls. "'iary. iSd-j. .mt) liun-iiitei est passed in "'ii/<(l tile issue ,,f .S|.-,o.o()(),,)(M) of anno- ( 'nited .Slat es Hole pity i:\()U rioN or I'lii: siandaud of vai.i'i: liciiri. T. These iidIcs were to he rteei' al)'e I'or all dues lo the (.overnnient and to he leyal tender I'or all dehls. |)iil)Iie and i)rivate, within the Tnited States. They were, Inrthei'niore, ixehan<^eahle I'or the (> ))er eent twen- ty-vear honds of the Tnited States at the option of the holder. The first hill was followed six months later by a second measure authori/.in<^- si.j().()()().()()0 more notes, and in ,)aiiuar\. ISC.:}, the total was inereased to .i<4()0.()()(),()00. 'I'hus there was injected into the circulating- medium of the country s tOO.OOO.OOO of promissory notes, the early i'Klemi)tion of w Iiieh at least dei)en(led on the success of the Federal army in the field and the reestahlishment of ]n'ace and ordei'. In accordance with (ireshani's Law, i^old entirelv disapi)eared from circulation after the first hill was passed, and pi'ices were soon expi-essed entirely ill t'^rms of the pai)er standard. The situation was liirther complicated in July, IHC.'J, hy the repeal of the |M(>\ision for Ihe exchann'c of the notes into United Stall's Itonds. and hefore the end of lH(i4 ^'old was (juoted at 280 in the \ew ^'ork market. In otlier \^o!-(ls. the "urccnhacks"" were \\<)rth hut .'}.) cents on the ddllar. It is ohvious that tlu' country was no lon^'cr on a u'old hasis. The unit of value was now the Ciovern- iM( nl's promise to ])ay Si in nold, a unit which fluctn- ated with the fortunes of war. 71. Single i^oUJ sldudard after 1S7!). — This condition lasted louij- after the conclusion of the war, l)ut naturallx' as it hecame i\ ideiit that the nation was to endure and the ( io\crnment linancts impro\ed, the di\c'r<4-ence he- l\\((n u'old and tlu' ])a])ei' standard u'l-adually decreased nnlil it was completely destroyed when in .Ianuai-y. 1H7-K tlu treasury idlVrcd to redeem its le^al temler notes I!! !H7;j nn act \\:is piisscd wliich made oold the sole Ic- et •MiiM;V AM) ll.WKiv,: „;„::,1 :;!:;.:;,: -'^ "«-' ^'y ^"'-'--i <'>■ «i.c. .■,.,<.„.,» Iri IK7K ll„. f,v,,s,„-y ,v„s m,ll,„ri,,.l I., ,,„rd,.sc. sil- ■^ Mi.r,„.-,„ Wt .„ll,„™..,l ,iK, ,„„,|,„, „, ,iK,, I, " II' <>'„,,,.,,,„.,. Hl.,rt„r the. Silvc,. I>,„.tv(„c.rt .•■ I o.„ ,„„,..,.,,,, ,,,,„„, ,,,,.,„,,;,, -■ l:l'''l""".,«"Nll.asa.M..in..nUK-si,,,,k.|cJ tli'^ iTM,„,|,t,„„ „f ,|,,eic ,,aynu„ts ,„ ,ht.>. n •• , • 'M i.mm; ,1(1 act was nnssf-r] on ?'■"" ''V''''':'>' '-'•'■''•■'■ "-■•■■n.v tiK- r„i, si ' "-S t„ I,.. ,1, ,„,, |„,„,,,,,. ,1,^, ^,,., _|^_| >" t - -nM„.i, as .1,,. I.„„ls ,1,.. (:„v,,,M,H.nt ,„',,.„ t' ,„ , V,... a„.l «,.,.n,l,a,.|<. a. pa,- „iH, ,«„,,, „, |,av ,e, 1 ■ .yiM.|i.,,H„ii,v..Uyp„,vi,i„r.,Mi„.i,.!..,i„,; ;^^^^ "--■"■I "»l"- ^ "P"., the. S«.vctarv ,,,■ ,|K. |,,av ;,;•■ l-«^;i ^l-.l.-.nl «a, a ,1„„,„, ,.,„, „„,,, „,',«;' i:\oi.i rioN OF 'I'm: standaud or \ \i,n: (j; silver: Irom lH.*}t until 1H()2 it was o()|(|. Tlifn came the Icyal tender ;!ets, and yreenhacks heeanie the actual standard, to eontiniic until I87!>. In IST.'J ^old was made the siuf^le le,ual standard: and iVdin the resump- tion of specie payment in 1871) it has l)ccii the actual standard as well. MICROCOPY RESOLUTION TEST CHART ANSI and ISO TEST CHART No 2 1.0 If us *^ 4 1 ^'^ 22 I.I 2.0 1.8 1.25 1.4 1.6 A APPLIED IM/1GE he CIIAPTKU VI STANDAUl) Ol' DF.I r.HRF.l) PAYMENTS 7i. Defects of onld. The next function of money to he considcrrd is its use as a statidard of (IcftTird pay- ments. Obviously this dilfers from its futietion as'a standard of value only because it introduces tiie time I lement. For this |)ur])ose, also. ut it is hy far the best that is krunvn. c;,,!,! is ,hirable. Once mined, it is added to the pnxhictions of the |)ast. to remain always a part of the world's supi)ly. For tins reason the amount mined in any one \-ear cannot l>ear ]ar<.'e eiiouol, proportion to the total amount in '■xistcjice to cause <>reat changes in its \alue. K\en with tiie j)resent annual production of over .$4.)().()()(),()(H) the amount in existence is so iai-oc that its \alue is much more stable than anything- v]sv which could be used i'oi th(.' j)ur))ose. Although the same was formerly true of sii\er. it- pi'oducfion has sn nreatly increased during the last tlnrty years that a sinol,. sJUcr standai-d ol' deterred payments woidd be xcry unsatisfactory. lUtwccn IH7(i and IH'.tl- its ydld pne.' fell .*)() per edit. C'hanncs as xiohiit as this wduld nnt ha\« tak( n ;lare had not silver bet II dciiKuicli/cd in tli( I'nited Slati s and hail not the natmns ol' Kuiopc aKd diseardt.l it {' si|\(r with res|)(c| to n(,|,| s( r\((l to discredit il as a standanl. i:....i.: :•. ■•]'■-'• : .' • t w i i C STANDARD OF DKFKHRED PAYMENTS 65 double standard, but shall reserve that subjeet lor more {•arel'ul eoiisideratiou in a subse(juent chaj)ter. In the absenee of a better, we are therei'ore forced to the eon- elusion tliat gold is the best standard for deferred pay- ?iients. 7.5. Definition of deferred paijmoits. — Deferred pay- ments are usually the result of eontraets. When we stop to consider that contracts play a part in nearly all business transactions, the inij)ortance of the subject is a|)[)reciated. Our investments, bank deposits, notes, currency, in fact, a lar^e proportion oC our wealth con- sists oi' conti'acts. If economic prosj)erity is to con- titiue. these contracts must i)e enforced. To this end the Constitution of the Tnited States declares that "no state shall ])ass any law impairing the oblination of con- tracts." Althougli the ])rovision ])revents the direct impair- ment of contracts, the same end may be accomplished indirectly by unwise moiutary laws. Anything, in fact, that causes great changes in prices will alter the elfect of conti-acts. Practically all contracts are payable in tci'tns of dollar-, and some of them I'un for long pei'iods. In order to securt' jxrfect justice between debtors and creditoi's it is lucessary that the dollar should mean the s.iiue at the maturity as at the begininng of the con- tract. Speaking accurately, this is impossible, for even wlicn tile contract is specifically made payable in gold, the purchasing powi r of that gold ;il'tei- ;i jxriod of Mars liiav liMxe ejiaiiged eo]\sider;d>lv. ('oiitra<'ts ])avable in gold, howcxcr. ba\e always Ixtm tln' most highlv re- g.'U'ded. beeauve no matter how distant the dale ol' ma- turity it is gen( raiiy Teil tiial tiie \alue ol golii will ap|)ro\intate its present \alu»'. 'l"he risk that it will be VII — f)() MONEY AM) HANKING III! greater or kss is only the ordinary business risk which every husiiiess man must take and for which he must make allowance in his calculations. A nrtat many contracts, however, are payable in terms of '•dollars," without s])ecifyino- the kind of doHar that is meant. While the statutes define a dollar as '2li.'2'> •grains of |)ure ^old. yet debts may be lercerd)acks that would I'ully satisfy the debt. 77. ('(nisliiiilitiiKilif// of Lc^nl Tinder Aetn. -TIk rio-ht of the (ioxcrnment to pass the Le^al 'I'ctider Acts Mas in fact declared uriconstituti(;nal by the Supreme {'•Mirt because it violated the clause of the Constitution ■-..iirii i;;rri,i.a Tii< iiii ji.i i iriiciii oj u\v vaJiditv ol con- tracts. 'I'his decision was reversed, however, bv a sub- S'lANDARI) OF DEFKRUKI) PAYMKNTS 67 sequent Siij)iriHe Court wliicli (kclarcd the statute con- stitutional under tlie autliorit I)rovi(le means for earrvino- on \\ y o-ivrn to Congress to ar. \V •uvjn<4' the question of eonstitutionahtv of lefj-al ten- ler acts, it niay he well to consider Avheth er under anv he gained ( ireunistanees tliere is any advantage to ;i(l(hng the legal tender i'eature to the various forms of circulating media. Does the medium hecome more val- lia'nje l)ecause of the legal tender stamp ^ Ohviously, if a country adojjts the gold standard, making gold Irgal tender, it increases the value of gold somewhat iKcausc it increases the demand for it. J?ut this is hc- ■•;!usc gold is iRcded as a medium of exchange. The legal tender feature adds nothing hecause it will circu- late at its actual metal value. AMicn a country attaches tlir legal tender stamj) to two metals we have already seen that the chea])er will drive out the dearer and that liie chtaper metal will also circulate at its metal value. In the case of the greenhacks the legal tender feature .i('led nothing to their circulating ])owc'r, as is shown l)y the fact that they iluctuated in value as the time of tli«'ir re(lemi)tion seemed early or remote. The legal tdider featuie, is, therei'ore, of value solely to the i!(l)tors, who can take advantage of laxity of their con- tracts to |)ay their dehts in (lei)reciated currency wlicn Miry should pay in the standard iik tal. It adds little, tlieret'ore. to the circulating power of the medium to which it is attached, and what little it does add reacts tn the a(l\antag<' of a single class. The whole jVn- silver agitation was an attempt to (liange the standard hecause it w.is helieved that in re- ganl to its use as a standard of dilVrred na.vments u-old was deCertivc. It is a|)parent that it is to the advantage of the dehtor class to have a standard which is coii- ^f 68 MONF.Y AM) BANKING iiii I stantly (lci)irciatiiin- in comparison with fr-oods; in other Words, that ^oods should be apparently rising in value. 78. Debtor claa.s injured by an appreciating standard. —From IHOO to 18!)(> there was a large debtor class in the country composed of farmers who had gone AVest and purchased land on mortgage. These farmers l)ought the land agreeing to j)ay a certain price in the future and a certain rate of interest each year. This ])rice and interest rate were based ujx)!! the value of crops, i)articularly wheat, which in the early 70's was worth as high as ^'1 per bushel. The i)rice of wheat gradually declined until in 1H1)4 it was worth less than .)() cents per l)ushel. The farmers found themselves unable to meet the interest payments, much less to pro- vide for tiie I)aying off of the principal. Tlvy were told that this condition was due to the appreciation in the value of gold following the demonetization of silver in IHT.'J. They were also told that if silver could be rc- nionetized, that is. made the standard of value alon}). It may he a little pu/zlin^' at (Ir-t. for it is natural to think of monev as a Hxfd and stal)le lliirii!-. "ith respect to which o*l'er thinJlMI «HII ir^aio 111 lllr \alUe asMinicd that tlu value nf ^old i> uiichaii>4ini;'. 'I'iie eoiiinioii l)elief in tlie stability of nioiiev i^ anali)0()u> to the illii>i()ii e\i>t- in<^- anion..' primitive people uith ivnard to the Milar sv>teni. Tliev think the earth is >tationar\'. It is their view point, and all I'hann-o (n, the >ereen of the tiriiiaineiit m.ih to th. m to reflect ehaiiu'cs in the heavens, not in the petition of the earth. 'J'he analo^'V, like all analogies, i> imperfect, hut it is su<<-gestive. 'I'lie fact that chan<^es in ])rice reflect chan tendency. ( )n the other hand there mav be a very oivat fall of pru'cs notwillistandiui.' the fact tliat conditions of supply and demand for commodities iustilV hi«dier pricis. The explanation of this must be soiioht for in the money market. The \ :due of mnn.y as o^ everythiiio- vhc is the result of an e(|uilil)riuui between su!)i)Iy and demand. How these forces j)roduce the result so far as ^dods are eon- r cerncd we haxc ali-ia(l\- seen III eiia|)t(r on \;ilue. .Im!> Mi.iicv ,inil ( SUrrLY AND DEMAND 71 The value of iiionev is determined in tiie same way, but the eonditions of supply and demand are so complex as to re(|uire a special study of tiiem. HI. VtUltii of moncij. — Money is utility in the form ol' immediate universal acceptal)ility. Its utihty lies in its exchan<4eabiHty in the same manner that nutrition is tlie basis of the utility of food. Money is demanded hecause of the need felt by men for this particular kind of utihty. Tlie name ^vllieh Me fj^ive to this conscious need of men for anythin'J demand. — De- mand as used in an economic sense is "'desire" backed u]) by the willingness to sacriticc or give up something in exchange. The oidy method we have oi' measuring demand is by thi' amount of \ahie which will be sacri- ficed in order to obtain the object oi' the demand. The demand for money can be measured oidy by the amount of other valuable j)roperty which will ])e given in ex- change for it. l/ndcr the foregoing definition the demand for moncv is limited, detinite. and lial)lc to fluctuate from f,. \\ If .. mill i.n'.i-c SJ'IOM i',,1. .. l,,>v m ('\ ident that bis desii'c for the horse is greater than his desire for $.*J()(). The seller of the horse would desire la MOSV.y AND nAXKINCJ ilii tlic in..,RT more than the horse. The ,,.ie.stio„ of the (leiiiaiKl |„r money !iiay he reduced to this: Why do people desire moneys ^ 8.'J. Thnr varulirs „f mi,„c,i.~ \n the first phice it IS necessary to (h-stinnuish heturen .h'tferent varieties "<■ money. There are three kinds of ,nonev: stan.hird money, fiat money, and crecht money. T|,e demand for these (hfferent varieiies is not uniform and under various cn-cumstances shifts from one to the other. Staiuhu-d money or commodity monev is some ma- terial which because of its proprietary (lualifications has heen a.lopte.l hy any particular oroup of people as a common medium of exchanoe, as explained in the ],re- (vdmo- ciiapter on the Evolution of .Money. Its supply IS reoiilated automatically, heinu- dependent on the cost I'l |)roduction. Fiat money is the medium „f exchanoe. tlie value of >vhich has IK. relation to the w(,rth of the material com- P"sm- it. Its value is derived from its utility as -i medium of exchanoe. Its supply is reouhited artifi- cially hy leoislative enactment. Credit money is simply a promise to pay the money which is m such form that it can he used as a medium nl exchanoe. \ promise to pay money hy some re- si.ons.hh- party m .y he just as valuable or'even more valuable than the money itself if it serves the purpose of money. _ «^. I'lat V. credit //,o//r//._Tlie distinction between <'^'t and credit money is an excee.iino-ly difficult one to make u. practice. In practically every <-ase of Mat ""•"(■y. there is a promise eitlur expressed or implied to- pay the amount in standard monev at son.e Ir.d^.finlt^. tin.c: If not a promise- at least an "expectation or'ac- ecptanee o| th<- money in payment of taxes and other SUPPLY AM) DKMAND 78 I Slims due the ^overnnieiit issuing it. It would he (htH- ciiit indeed to imagine tint money whieli the government itself wouhl not aeeept in payment or whieh it never i.\l)ec ted t o redeem ■I S5. Demand for moiic// anali/rxd. — Tlie demand ir monev nuiv he studied hv analvzlntr the various torms () f d esire for monev. 1. People desire money for the purpose of exchang- ing it for other commodities within a short time. '2. l^eople desire money that they may have a store iif \alue which for the time heing is preferahle to goods which have a (1; (lini't utility, '. e., those affording satisfaction hy tlieir use, or ('2) indirect utility, i. e., the use of which jjroduces more value, as in the case of all cnpital gootls. In some I'are instances the money is esteemed for itself alone without reference to its ex- changeahility, as in the case of a misers hoard. a. People desire money as a reserve liasis for credit. These three classifications cover all the desires for money and changes in the intensity of these desires have a their effect on the Aalue of money. HO. liapiditji of circniation.- — The extent of the de- sire for mon'n' for the ])urpose of exchanging it for goods within a short time determines the rapidity of circulation. The measure of the rapidity of circula- tion of money is the form of exchanges, which is de- Ijcndent upon four factors; 1. The numher of popu- lation. 2. The production and distrihution of wealtli uw capita, 'i. The extent to which division of lahor nr speciali/ation of employment prevails. -4. The ex- tent of the integration of industry wr //' //', ./ /./' ,/.,/; rui, \] 1111 fl'L." il<'lf1/l* <>i1t1>ll louhling the poj)ulation would douhle the demand for a I'lrcuiatina' medium Thei'c woidd he t wice as ma »y , '^!* nil '^^ MOM.V AM) HANKING producers and twice as many consumers. Tlicrel'ore it would re(iuire just twice as niucJi money to circulate the goods re(iuired for their consumi)tion. ' In a country of increasinu' l)o|)iilati.)n. thererorc. there must he an in'- crease in the (piantity u\' mone_\ . Otherwise the in- creased demand upon the supply will t,.|„j to raise the value or money. I)rinniiiu> witji it fallino' prices. Kven with a stationary population, advancing- civiliza- tion inevitahly hrings an increase in the production and consumption of Mcaith. the circulation of which i)uts a greatei- demand upon monev. 88. Kll'cct of (Vnis'ion of /a/;or.— Alono- ^vith the in- creased production of oo,„]s per capita comes the in- creasino- division of lahor. In fact, the greater special- ization of employment is one of the most potent causes of increase of wealth. In primitive communities wliere the producer consumes a large ])art of his pn,(luct there is little demand for money, not at all in projxM-tion to the productivity of each man. Whenever men hegin to conHne themselves to fewer occupations, especiaUy if at the same time the variety (.f their wants increases, they are under the necessity of ohtaining their supplies hy means of exchange, and this exchange re(iuires a medium. Hence it is that division of lahor reciuires an increase in the supply of money out of projKH-tion to the increase ol" ])r<)(luct per ca[)ita. ()pi)osed to this tendency and lessening somewhat the (k-mand for money is the integration of industry. AN'hen a numher of individuals or corjKJrations engaged in the various i)rocesses of the manufacture of Ti line oi" goods comhine so that the several i)r()cesses are con- ducted imder one ownershij). the neeessity for a larue numher of exchanges is eliminated. It may even go so far that no exchange takes place after the r.iw nm- SUri'LV AND I)i:.MANi) 76 ■.3 I ttiials :UT i)urchasc(l until tlic tinislKcl i)ro(liict is sold to the c'onsuincr. H9. Special (hinand for i^old. — Uiuler prcst-it condi- lidiis in this coiiiitrv all tlu' f'oi'nis of money in ciivuia- tinn |)(.'rr<)i-in llu- rnnction of cxcluin^in^ ^^oods (-'(luaily \\(li. with possibly a slight ad\anta<4V on the j)art ol' j)aj)cr credit money on the score of convenience. Ill our trade with forei<>'n countries, however, if there is a balance of imports over ex[)orts one way or the other wliieh must he settled with money, there is only one i'nrm which will serve the ])nrp()se, i. e., ^old. Increase of demand from this sonree, may under some circum- stances tend to enhance the value of ^old, inde{)endently of the value of the other forms. This phenomenon ap- ])ears in the form of a preUiium on gold, of which we shall speak later. !)(). Pai/mcnt of contracts. — Anotlier demand for money is in the ])ayment of contracts. T/nless there is a dis})arity in the value of the different forms of money the demand for money to liciuidatc contracts is likely to fall on all etiually. Sometimes the demand for mone}' for this purpose is artificially interfered witii by the (iovernment, as in the case of le^al tender laws which force the creditor against his interest and inclina- tion to acce])t certain forms of money such as the green- backs. The tendency in such a case as this is to shii't the demand from gold to credit money, and thus to eliminate the disparity. 91. Store of value. — The demand for money as a st(.*i. -V/^< ,7V// (fnnanil for m,>tuf/ as a sloir of value— In every country, however. „<. mailer how stahle the ^•""ilm, nation of Ij,. j.oom is approaeh- -■■ = ■• -■-■■• .i.;.ii;s i> i,K, i\ (o he |)er('ei\ cd siid- ''"• ''>•■' '•"■.^' ">iniher(,f peopi,, ns ho at onee heeome in I SUPPLY AM) DKMAND < ( eager to cxflumge their propcrtv into cash; the desire dt' a hirge lunnber to sell id the same time of course hiiiigs a siulcleii fall in prices whieji we call a [)aiiic. '{'he converse of this takes place at the Iieginning of ;i lioom period, when people realize that pi'ices are too Inw and that purchases Avill yield large speculative |)i()Hts. There is a rush to i)uy, that is to say, a desire to convert money which is about to i'all in value into I'orms oi' i)roj)erty which will increase in value. 'I'lie desire to convert proj)erty into money is only one 111' the causes and symi)toms of a panic. In a later iha|)ter on credits a fuller discussion of this will he uiven. The liciuidation of credits, either forced or vol- imtai'v. at the beginning of a ])anic accounts for a large pii't of the sudden demand for money and is the prox- imate cause for the liciuidation of j)ropfc,'rt\'. !>t. IltHirdhii^. — When the storing away of money liecomes excessive we call it hoarding. It would be ex- (ccdingly ditTicult to attempt to draw the line Mhere hoarding begins. 'I'he amount of money which prudent people will have ready for necessary purchases and the payment of debts will vary widely under different cir- cumstances. In the panic of 1!)()7 the country l)anl\s .ill over the country withdrew their deposits from the New ^'orl< banks in order to be amply protected in case iif large sudden demands from theii- dejxisitors, A ureat many banks cairied this practice to an urueasof- ablc extent and filUd their \aults with money for whii'h Miey jiad no use and for which thei'e was likeK' to l)e no lisi- cxci'pt in the case of most e\t raordinai'v disaster. S"icli storing awav of money might propei-ly be called lioardiniL!'. 0.). i'hci'i l!( (if i/diiniitijf. Steady jtrogress lu tiie liree tiiiii of improving the linaneial atid lianking sys- 78 tf|i MONKV AM) HANKIXG terns and the widespread e.lneation nl' the people in the advantages of deahn^ with banks lias chniinished hoanl- in«- m this ecnuitry nntil iwider nonnal con(htions in the prese,^ era it is praetieally hnntecl to persor.s in rural (I'striets and to a tew eeeentrie in,lividuals wh.. are will- H.J( to rnn the risk of rohhery in order to enjov the •snt.siaet.on of an oeeasional view of a pile of' v'elhnv coins or ol u;yfL'u paper. li is extremely easy, however, to frighten people out «>1 then- hanku.o- |,ah,ts and eause them to revert to the more primitive methods, 'i'he f-iihir.' ..f .. . . • I , ,, ^ "^ i.uiuie ot a prominent ;ank or the exposure of improper methods in hiVh ^jnanee u ,11 u.duc.e a o,,,at many timid persons to wit^i- «t'-aw their deposits fn.m l)anks and stow awav the |Hf hoards.^^Thv enormous sums "' money stoivd in the vaults of hanking institutions are ;;;' '"•*"';'"^, "■ ^'"' -"- *" -'•■■*•'' -<■ a,., usi,... the term, llicse dollars are really supporting- the .-mlit of the '-"..try wln.h as a suhstitute is rL In laet. a dollar ma hank reserve haekiuK up c-ml.t .s really d,,in^ four or five tiiues as n.ueh work ;/s its brother meireulation. The full explanation of this point IS deferred to the diapt.rs on e,vdit. 07. anrn-nnuni hoan/iu^: While the oreat sums r,f ;•""->•'" '••••"k .•-.rves are not hoanls unless thev should •;■ .x^vssive. their aiv at times hu^v amount,; in the ...vm.n.rni treasury and suh-treasuries whieh are reallv ,'"';',• "'•' '^'" '"I'.i.'s that $i:,(M)()(,.,„„) i„ .,,,1,1 ^l.'.il hr maintaine.l {„ ,|,, ,,,,,,„,^. ^.^ reserve a-, dnst the ^reenhaeks outstandiiin-. ■serve and not a| all a ho;.-! sil ver, both coin and i I'his sum is a true r(>- , ...1 1. . . . . iKM , , liic yoi(i and •""'"". "liiHi are held in ti, SUriMA AM) DK.MAND 1) ¥^ [1 the )ar(l- ) the 'lira I will- tlie Hon- out the lent ith- the lace I ins are rm. the ley lip as his of lid he Iv hi st e- i(i le I I treasuries and af^aiiist which ^ohl and silver certiticatcs are circulatiu<>- are not hoards, Tlie pa[)er money which represents them is doing the work hy proxy. Unhke the hank reserve, however, which through its suhstitutes does four or five times the amount of money work, the uohl and silver certificates do no more than gold and silver itself could have done. The only advantage de- rived from the system is the greater convenience and llie saving of the wtar and tear on the metal. Another part of the money held hy the (iovernment represents a store of cash ready for future expenditures. This is the sum necessary to he kept on hand in order to provide for ])urchases within a short time, just as individuals find it necessary to keep a certain amount of (■;ish on hand for the same purpose. .Vnv amount of money held in the treasury heyond tlie sums mentioned ahove is a hoard, ir'i)resenting jnirchas- iiig power which is withheld from cii'culation and for the time hcing ahsolutely useless. 1)8. Disiriinitidfioii in demand for tnaiici/. — The dif- tVrent forms of demand for money which we have out- lined ahove do not apply at all times eijually to all the ililferent varieties of money. There arc sometimes cir- cumstances when llu' (kiiiand falls ui)on one kind alone. So long as all the different forms are kept at parity the ilemaiid for a circulating medium to exchange goods or to li(piidate debts is satisfied with either form. 'I'heti soiiulimes the « of money (except national bank notes ,n national banks tbciiisth cs i ser\c the purpose of bank reserxcs e(|ually well, although gold is |>rcfci'ab|c be- cause it assists the (Jo\ermiient ii: siippoi-tiug tlu' cir- culating credit. It has been j)ro[)osed in recent currency hills to compel the banks to m;iintaii; their reserves in -old in order that tlu re shall always be a satisfactory hasi*^ for the ci'cdit of the country. 102. Viiviilii'nili, of IIk (l('m(iii(! for moucij. 'I'iic '!( iiiand for luomv is a xcry uncertain (piantitw The iiiict rtaint les o lit s suhstitutc. credit, mav cause \erv sud lien and \(.ry great changes in the diniand for nioi uv, \ II- \/^^' 82 .MONEY AND BANKINi \ ' Tlie growth of population iiiLTcascs spt'cialization of em- ployment and tile increasing volume of industry per caj)ita causes an increasing demand for a medium of excliange. On the other hand, however, the perfection of the credit machinery and the extension of hanking facilities economize the use of money and lessen the de- mand. The suddemiess with which any derangement of the financial machinery will cause a shift of dcrnand from one form of money to another is one of the com- l)lexities of the subject. 1 ().'{. SuppJii of moucij. — In contrast with the insta- bility of the demand for money the supply of money is so stable as to give rise to the problem of "clastic cur- rency." 'I'hc only ^ariable clement in the supply is found in cridit, which is a substitute for mojiey and does the same kind of service. 10 k Vfiriftiis of Ignited iSidfcs rtwiic//. — In the TJnited States at the preseiit time there is in circulation, first, the Knited States notes or greenl)acks. The suj)- ply of this form of money is absolutely unchanging, amounting to .$3 MJ.OOO.OOO. Second, the gold and silver certificates, representing actual metal de|)osited in the trcasin'ics. The sup{)ly of these certificates varies with the amount of gold and silver dej)osited in Washington and the increase or de- crease in theii- amount is offset by a corresi)ondiniflv opposite change in the supj)ly of metal money. Thii'd, National bank notes are somewhat elastic, but are so limited by the amount of bonds which banks can ac'.iuire to deposit as security i'or Iheni that the supplv does not (•li;uigc in rcsponsi- to the demand. I'oiirtli. The supply of silver eoinag.' in the couiitry is rcgiilalrd I'v arliitrai-y action of Ijie Government. SUPPLY AM) DM.MAND 83 a Outside the siihsidiarv coinaf^c its use is so limited that it cannot he re^nirded as an ehistic elejii'.nt. L'ifth, (iold is tlie (Jiily n^ally thistie elenieut in our country at the present time. Tlie amount in the country for monetary purposes at any time is influenced hy ouV financial and trade relations with forei^^-n countries. In tlie chapter on foreiii'ii exchanges the causes of increase )r decrease in the (luantity of o^old in the country is , \l)lained in all its details. 10.). Stipplji of ^'•o/' it with water |)oured into one of a series of vessels •oimected hy pipes. U^ater jjoured ii:to one vessel dis- irihutes itself throuiih all the connected series so that .)ne level is maintained throu^diout the whole. If the pipes ar'' small or cloi^'^red up tliere may he considerahle delay in the (listrihution of the water. In the case of H'old there may he for short i)erio increased (piantity of gold will do no more money work than the original amount, and the money supj)ly of the world has n..t been increased at all when measured by its c Ifectix eness. lOH. Ilisfurical /////.s//7///V,./,',v. -Then bav<- I,. ...i three periods in history whid, illustrate this nv.ural j»roposi- tion very clearly. The -r. at increase in the amount of SUPrLY AM) DEMAND 85 I sihtr ill the world ut'tcr tlie iliscovery of xViiicricu and the opening up of South iVnuricaa and Mexican silver mines by the Spaniards in the sixteenth century caused ;i tremendous change of prices for e\ ery commodity. The discovery of gold in California and i\ustralia in the middle of the nineteenth century was followed by a similar rise in general prices. At the present time we are undergoing a ])eriod of increased gold production, (Specially in South ^Vfrica, and accompanying hi/I'll prices. In each ol' these periods the great enlargement of the stock of standard money in the world produced a pro- found social effect and radically altered the relations Iittween dei)tors and creditors. The small (piantity of money metal in existence before these discoveries were made would to-day do just as much work if there had lieen no increase, but the le\el of prices would be very low indtfd. The value of the dollar might easilv have Invn ten times what it is to-day and 'J.i cents might have been a fair (' 'v's wage for the unskilled workingman. This ridiculously low level of prices, however, would ti(»t mean anything at all if all \ alius were in the same proportion. If the necessities of life cost one-tenth of (he price which \\e are paying to-day, 2.") cents per day u ages would be as satisfactory to the laborer as $2.50 is under present conditions. 109. Ti'tnporari/ n'siilts of cliatiiic of monci/ sitppl//. While it makes little difference whether the absolute [)rice level is high or low so long as relative values are iinchanged, yet changes in the price level are likely to have great economic results because the ])rice of every ( oiiinioclitv that is boUi2ht and sold, docs rwtt chanue ' (lually or sinniltaneously. Therel'ore a change in the general price level is likely to cause a general change in hi m m ■>i;^3»^ 8G MONEY WO HANKING III the relative values. Kspeeially is this true of credits. Jf a (Irhtor lla^ i)r()iiiise(l to pay a creditor ,$100 in ten years, and il' within that i)eriod prices have chant()ek and his huyin„l,l is simply that it is the fh'st to f^el the effect on pr-'ces: it camiot ixi)ect to retain perma- nently any more than its proper share of the new v.-ol(I so lon^- as trade is free between it and foreign countries. it would be uiipossil)le to increase permanentlv the sup- ply of o-old ill tr us country without I'lvmo- the other SUPPLY AM) I)F..MAND 89 ■ (Miiiitrics llicir pi-optr pi'opoftioiialc share of it unless we used il as a suhstitute for other tonus of money which were letired from cireuhition to make a place I'or it. 114. Comparkoii of effect of iitrrrasc of .sitpjili/ of ^(ihl and paper iiioiie//. — l''ollo\\iu_o- out this |)rineij)Ie liMthir in eonneetion \\ith eredit money it will a])])ear that it is im])ossihle I'or a eountry to increase its su])j)lv nf this foi'm of money and kecj) it at a pai'its- with yold unless thei'c has heen an increase in the demand I'or money due to enlarged \«»lume of husiness, increased |)o|.M!lati()n, etc. Suppose the (iovernnient were to issue $.'500,000,000 new United States notes in addition to the $.'U().000,000 already outstanding in cireuhition. Suppose these notes were ])aid out hy the (iovernnient for extraordinary < xpenditures occasioned l)y some <»'reat puhlic enterprise, Mich as the Iniildin^v of a canal or for materials to carry on a war. These notes Mould go into circulation and cause the same rise in jjrices as an ecpial output of gold. The higher piices would attract imports and discourage (\|)()rts and there would he credited against us a dehit halance which would have to ])e settled in "old sooner (ir later. In this way the issue of n.)tes would continue to drive gold out of the country hy attracting into the country an ecjuivalent amount of goods from foreign countries until a new etiuilihrium of prices throughout the world were estahlished. When so much o()ld has heen driven out that it becomes difRcult for the hankers til find gold for export, the (Government would prohahly he unable to maintain the new notes on a par with gold, and there would apj)ear all the j)henomena which accom- pany a depreciated currency, about which we shall have much to say in a later chapter. III 90 MONFV AM) HANKINTr III! iNNt nil 11.). IIoxc mucJi moucji is needed in a eoiinfn/^—ln the campaign, of ISiM! we heard a n-nat deal in this coun- try ahout tlie scarcity ol' money, and onr of tlie strongest aro-.nnents of the Silver Party was that tlie country needed more money io do business properly. They said that o,„h1s wpt less than fifty cents a bushel for bis wheat. 'I'here was plenty of monients of fixed incomes. 1 17. Stimiildtiiiz effect of risin:^- prices. — There is one effect ol" increased money s!i|)j)Iy. the benefit (d' \>hich has no corrcsjjonditig disa :^ro^EY and bankixg trial activity leads to IJic nnatc r production of wealth in the form oi' coiisunijjtion i-oods and means a greater i)er cai)ita distri' ition. Therefore, economists have coneluded that a condition oi' oradnally increasing- prices is the ideal one for any community and since it is within the }K)wei of a community through the aoeney of (iov- ernment to regulate the rise and fall of prices throuo-h the mani|)uIatioii of the supi)ly of money, it is possihle to make oreat economic in;|)i-ovements hy this means, as we shall diseox cr in a more detailed examination later. lis. 7/ rising as from falling ,„-iees if the tendency toward higher pr - levels is allowed to run into speculation, t! over- expansioi. (,f eredit and the inevitahie collapse which fol- lows. Whether it is j)ossihle for a Government to so regulate the rise of prices through Ihe manipulation of the supj.ly ol' money that the evil conseciuenccs can he avoided is a matter which may one day hecome of great iniportanee. especially if the unregulated production of gold should go on increasing at too onat a rate. In the present diaphr we have seen that the value of gold and conversely the general kvel of priees is de- termmed hy thr supply of and d( niand tor money. The value of money at any j)artieular moment rejjresents the eciuilihrimn hetween these two forces. Kach of the forces, however, is eom|)ose,l ,.(' ;, u,vat numher of tend- encies. SouHtinies lliere may he ;, particularly large ''•"i;uid Inr n,,|,| j,, ,,,.,!,.,. I,, ^.xcliaiim. a large volurne ••I' prndn.v. while at the siiuu- time lli.' demand for goM as a store of value may decline: the force of denwind "'"■••f'Te is iiie tinai nsuit of a numher (.f ten.leneirs and countertindencies. Ill>. Sxcifliis (if lU-irrs. .Vn !■-!!•>>!!•;..>- .--.f 4!... strength of Ihe y which all |)ro^ress occurs rhythniically and not stead- ily in any oiven direction. The course of prices on the stock exchange, the recurring- periods of (lei)ressi()n and prosperity, the ,iireat cycles of rainfall, are examples of tiiis o-reat natural law which is found to prevail ^roncr- ally throughout the universe. 120. Cmnulativc effect of caniomk' forces.- ~'Y\\ii ex- planation of these (rreat economic swiiii^s of jjriccs and values is to j)e found in the cumulative effect of the economic forces. We are all familiar with the oeneral pessimism that han^ys like a cloud over the eommuiuty during an economic depression. The ohvious fact that die existin^r sujjply of m(„„1s is steadily diminishing^, diat tile savings deposits of the j)eoj)le are increasiriir in amount in conseciuence of the hard lesson of thrift which the jxople have learned in the hard times, in ^pile of the steady deterioi'ation in the industrial e(|uip- ment of tlie country, the wearing- out of the rails and rollin;^' stock of the railroads all lliese factors instead "f inspirinn- confiiUricc I'or llic future amonn- husiness men are even used as an ari^ument for continued hard 1 .rues. When the inevitahle demand for ^roods uhich has tem- I'orarily heen delayed finally heoins to assert ilsi'lf. at tiist slow ly. the husiness community ^raduallv heoins to liope that prosp( rity is returninu'. As the prosperitv continues the ( lunulativc effect of n turnintr confidence makes itself felt in ri^inu prices, and since an ad\ancc ::; j/iur--, r;i(,iFis iai;:;er jMi>iii> io .inximiix owuiiio an\' kind (»r pio|,erly t \e( pt ukmkv itscll'. tliire arises an ,-, ^^.W 11 tiff £ U-t MONEY AM) HANKIN(i enormous; (Icmand for income yielding property of all sorts, even that whieh i)roniises to return only a specu- lative profit. When industry is at its heioht and prices have l)een l)ut to record hreakin^r levels everyhody is optimistic and hopeful of si ill l)ett>er conditions. It is at a time like this that the careful ohserver will note that the produc- tion of hoth consumption and production ^yoods has in- creased tremendously and will likely soon surj)ass the needs of the conmiunity. lie will note that the hiu'.er ^ prices ^o the smaller is the i)rospect of still further ad- vance and the nirater the prospect of a recession to lower levels. He will note that the rate of interest is very hi«4h. indicating- a scarcity in th«' -uiJijly of loanahle funds. His conclusion from this ? of affairs will he that in the near future there must inevitahlv he a "-reater demand for money and a coiise(]uent increase in its value. He also will remcmher from previous experi- ence that the cumulative e+lVct of human cujjidity and optimism which has carried |)rices to ahnormally hiyh levels will have exactly the reverse effect when it is turned in the opposite direction. When the turn comes and the downward tendency l)e^ins a corrcspondiu"; scranil)k' to dis])ose of ooods and to ^et money in order to realize the increase in value will set in. These ^reat swings in prices offer an exj)lanation of the fact that for hn\'^ periods of time an increased demand for money has se( ined to he accompanied hv a fall in value of money instead of a rise. The natuial etlVct of dema?id in this case is simply sus|)endc(l for the time Ixino. }„,t whci it a^ain asserts itself if will do so with far more than the ordinary conse(iuences and v.ihh> mil i.L eariied mucli lower tiian liiey otherwise would he. fc^\ CHAP IKR VIII THEORY OF PRICES V ■ . *l 121. "Short" sales of moncjj. — Every buyer and srller whatsoever is a speeulator in niniiey. though he may not realize it. Kvery debtor and erefhtor is not only ;i s|)ecnlator i?i money but lie is a sjxenlalor in "I'n- tiH'es." Kveiy debtor has sold money short in exaetly the same way as a sj)eeuIator on the board ( I' trade has Mild wheat short when he has eonti-aeted to deliver a eer- l.iiii number ol' bushels at a ^ixcn \)v'\vv at a future time. lie gains or loses as the price at that time of delivery lias fallen or risen. It is an axiom in the speeulati\e markets that there 1^ no better guaranty for the maintenance of ])rices than the existence of a large sh.ort intertst. the reason lieing that those ])ersons are ])otential j)iircliasers who iiiust buy within a gi\en time whether they wish to do ^o or not. 'I'hus in times of ere-"' the money shorts is more familiar under the name of a money j)anic. A man who finds hirr.self ol)liged to make a payment at a certain time has a choice of one of two courses; he may either l.orrow or he may sell something he possesses ill order to provide himself with funds. In a severe money panic it is practically imjxjssihle to horrow money, even upon the most select collateral, and there have lieen days on tlie stock exchange when call money ran as hi<4li as ISC |)er cent per annum. 12;}. Forced selling.— Vudvv such conditions the only recourse of the dehtor is to sell whatever property he possesses, at the hest price olitainahle. This sudden pressure of sellino- ,i])on a market which is disinclined to i)ny will iH'rmit pi'ices io descend to a level which would have seemed alisnhitely ridiculous a few months previ- ous. There are not wanting- at such times shrewd peo- l)le who reaii/e that there are extraordinary i,.arTeat majniily of jjfople. however, do not recooiiizf these iiar- gains. even if they have the I'unds; and instead of huy- ing in a market which offers them a practical eertaintv of an increase of -J.-) to 100 percent on their investment, they prefer to kecj) it stored away until the strinoency as well as the hargains have become a thitiir of the ])ast. 124. I*t()/)lc hccnniiif/ better educated There was evidence, howexcr. in the panic of IOO7 that the peoiih ii. gLiiCiui .in u, 111111114 10 iaixe a(i\antaye oj tjie oec'a- sional opportunities which these great swings of prices TiiEoKv or rincKs 97 nlVc r tliein. The ixxiks of the ^reat corjxjrations siicli ,is llif riiited States Stfcl Corporation, tlie I'tniisyl- \;iiiia l{ailroa() Knives 20.00 100 1,>.(M» 75 Silk clolh l.iO.OO 100 K'0.00 80 4) 400 :J85 100 9fi-i.4 In this table we have made a hypothetical list of the TIIKOHV OF I'HICKS 99 prices in 1890 and another for the year 1892. These [)i-iees should i)ieferah|y re])reseiit an averafrc for a pe- loid of time in ordei- to avoid any accidental lluetua- tions due to the season or otlier tenmorary causes. The piiees for 1890 have l)een made the hasis at 100 per cent and the increase or decrease calculated witji reference to this hase. This table will show that while some prices lii\e advanced othei's have fallen so that the «feneral k\el is dinn'nished .'J-"' ; per cent. 129. "Wcii^lilin^" of price tables.— U may l)e ob- Mcted that in this table we have giren exactly as much importance to knives as we have to wheat, whereas we know that a chaufjre of a cent a bushel in wheat would have vastly greater etrect on the demand for money than a change of 100 per cent in the value of knives. To cor- rect this difficulty a system has l)een devised for "weiglit- iiiy"' the xarious items in a ])rice table. The principle of ■'weif^hting" is to find some basis of estimatiuij;' the amount of the particular items and exchauoe either on the basis of total j);-')(luction or consumption. To wei<>ht our jjrice table above it would be necessary ill arrange the four items so that wheat would have an inliuence on the result let us say one hundred times as -reat as km'ves: thai cattle would have an importance lifty times as great as knives: that silk cloth has an im- portance say ten times as great as kr)ives. The table modified to conform *^o this weighting ari-angement is given below: 18!)f) ISO J v.'iicit 100 X sp 1.00=10(1(10 .-« i.io— noooo '■ittlc .40 X .jO.OO^r ,)(I00 ()().00=r (jOOO Knives Ix JO.OO = 100 l.").()0= 7,5 Silk cloth 10 X l.>0.00= 1(100 l.'(M)0=; 800 I'll 16100 17875 1007o 111 i 161% While the weighting of IJie price table seems to pro- III 100 -MO.NKV .\M) HANKING m (luce a very oreat eflVct upon our .sample tal)le, yet in inakirijU,- actual tables where the numher of coniinodities is much greater the (litfereuees shown by simple and wei;0i, Senate Oocutiicnt. 5 :nil Cdiijfress, seeoiul Session, No. 1394, "Wholesale Prices, Wages and 'rriaisjinrtation." THKOHV OF PHK r.S 101 niodities taken had decreased to '.).:.-' per cent in 1891, an avera^-e of 7.8 per cent. FAI.KXKU PRICK lAIU.I': c be c J2 "is u ■«,i fi 2 1 ■^ fa u l-K» 96.() 110.7 I'^H in. I 11:5.1 i'^y- h-'.!) 10(1.!) 1-^1:5 79.3 1S M5.5 K7.,i I>^t9 79.0 8.'..' l^.iO 85.5 91.3 IS51 9().(j 91..7 185.' 88.7 88.7 l^^fU 101. ,> 98.() l^5t 10,-,.9 1)7.}. 1S55 111.8 9U 1^5G 110.). Kio.ii 1857 117.5 lOfi.O 1 ^^58 9 IM iis.O 1>'59 'Ji^.S 101.1 iMiO lOO.O 100.0 1>'<>1 95.8 !)1..9 !•'((-' ll.).! IJt.I i^(i3 i:5:i.o loi.i; IMil 1G5.8 .'(io.7 l>f>5 .>1().5 J99..' i^'iifi 17;i.s .).'(i.ti 1^^1)7 l(l,{.9 179.9 iS(i8 Kii..' IKi.s !''li9 l(i.>.9 U7.5 l'-70 153.8 l;!H.t !^71 1(J9.3 l:i:i.3 i-'7i 133.3 113.0 l'^73 l.Hj.H 13ii.9 l''7V 131.5 l.'7,9 !>^75 130.5 l.'O.l :-:7 I.>o.;{ 101. M 1-T8 107.0 |i;i.,> 1^79 97.tj 91.1 o w "-" — -Z L- C w ~^ &< 133.5 110.0 Q 1 15.8 1^ 1UI.1 117.1 < 395.8 llfi.S -'08.9 l.'3.7 111.8 111.3 ll(..l 117.1 115.8 -'o.'.o 11S.7 10S.8 131.(1 1 Iti.l 170. (i 107.8 1S7.5 1 1 1.7 105.1 1 .' 1 . 1 100.3 1 .'A.:, .01.5 119.7 1,13.3 103.0 lift. 7 lo.'.3 l.'9.5 101.9 .'39.fi 110.8 lOfi.7 l.'l.o I(i.'.3 1 11.8 10.'.8 1 i:!.s 11(1.9 lod..' I. '3. 9 lll.i* II 1.0 lOfi.l 110.7 l.'o.d Ids..' 1 1 J.:> 1J0.3 l.'l. 7 10(i.5 lOfi.l 119.7 105.3 113.0 1-'1.7 l-'5.(i 101. -V loo.u l.'1.9 97. (i II 1.0 1 .'0.5 109.8 9h.7 1 ().'.() lU.S 10.'..' 1 J.i.ti I .'5.(i lf)7.7 10. '.3 97.3 119.-' 97..' 1J5.S 1 .'0.0 10.'.7 105.9 93.5 117.7 100.1- 111.;- 111.9 100.5 10.'.7 lOl.fi l-'-\8 103..' 107.0 118.7 109..' lf)9.1 10(i.8 l.'5.(i 111.1 110.7 l.'l..' 10-. 1 1 1 .'.9 l.'l.l 117.8 1(J3.1. 1.'9..' I.'l..' 115..' 113.1 l.'fi.t 115.3 10-'.8 135.5 115.5 l.'l.fi 113.; 113.3 no,! 105.0 l.'fi.S llfi.S 110.0 1 1 -'.5 lll.t. 101.3 103.8 llfi.O los.7 97.1 I0I.8 98.8 100.1 9>H.7 101..' 103..' loo.s 100. J 100.0 100.0 100.0 100.0 100.0 KJO.O 100.0 103.5 10.'.5 108.9 101.3 9(i.8 100.7 IflO.fi 97..' 117..' 1 19..' IKi.l 89.5 103.7 117.8 107.1 110.0 177.1 1 If). 5 l.'3.1 l.'9.1 lls.(i 180.J 179.8 J .'1.3 170.3 Ifil.fi 151.1. 190.5 .'37.8 191.1 H.'.l -'71.(i 1M.1 ■.'o.'.s .'l(i.8 .'80.5 171.1 lM(i.9 -'30..' 1S5.3 171.0 191.0 19(i.3 If) 1.3 178.8 -'11..' 159.1 ll.l.l 1 7-'..' -'18.7 150.5 17)-.3 177.9 131.9 Itit.l 1fi0.5 JOfi.S 111.3 lf)5.9 UiO.9 l.'0.7 l7.8 118.3 119.fi l.'l.fi 118.7 1 l-'.3 lU.l 1. '.'..' 151.1. 139.4 l->8.5 U8.8 13().0 1 1!)..' i.'s.o l(i(i.9 131.0 ir.u 13.'.7 138.8 131.fi l.'O.S 171.9 in. 5 loil.I 131.1. 137.5 1 19.«) l.'l.l 151.9 14-fi.8 109.5 l.'9.8 133.0 15().5 117.5 1 13.7 lU.-' 95.0 I. '.'.9 l-'7.6 1 Hi'. ] '. 1^ 1 :'?7.3 K'l.H H7.-- ; ; \ J i i'p.i los.o 100.0 l.',-,.8 1TJ.3 93.0 79.0 118. 9.'.1 llii.s HI..' M.3 111. 95.3 88.t 115.1 110.9 68.(! lO.'.l 110.9 101.3 96.6 IH i02 :\ro\i:v and it wkixc; o y o ^ 3 %^ ■=.- - --z ' ~ _^ ^ ^ ^ P. ^ c ~ 5 < [!;:;'' !';'■;' '"^-^ h)o.~9«;3"i:{o.9~Yi31~85.71o9.h i,.,;., ^'- '^.^ "'-^ I"- ^-.' 'ii:i !)s.I 77.,-, ii7.:i i.m.d ^^;^ ';:-l ^l-': ^"•" '--l l^'i" ^'if 7'^■' i'l.i) 7l.y l.'t.H Wi.d ,,,;.y sy;{ yi- ^^ '"••' ^■<-'* !•'■;< '^.i' 1^1.0 J'S.s r.i.o sh.s y+'} ^'" '"^■•* ^-'-^ !'•'■' -i.-' i-':5.: ^r.y .ly,^ hy.7 y.';} ^"^"^ i'>->-» ^l -l yi.U 7t. D 1J.>.3 H(i.:{ 70.1 95.1 9.'. J Til the second taMe we Imve a taljulation of the .same data in Mei.l} 92.2 TI Simple arithmetical averages. All ar tides. \^n 101.9 Isl.j . lo' 8 Istfi KKi.l. i-^t; 10 ;.5 IHIS lOi.t ^^V^ 98.7 IVH) ii)-'.;{ is.H IOJ.9 IKVJ . 1(» ' 7 ls-,:5 109 1 l^.U ll-'.9 I'^j.j .. ii:i 1 lS.i(J li;5-' ls,-,7 1 1J.5 ls.-,S 101 8 is.">y 100. J IXiO loo.o isiil . 100.6 '^(L' 117.8 Vi 118.6 ■ii 190.5 1 Sli,") . . . . .'16.8 IMilJ 191.0 1S()7 17-'.3 !S():4 ICO 5 1H()9 iJJ.a ISTO 1 t.'.a ISTI 136.0 IS-.' 1:58.8 IHT3 137.5 1H?4. 13,5.0 1s7j U'7.6 IsTO 118.3 1>77 110.9 1S78 101.3 1S79 96.6 ISSO 106.9 1S«1 105.7 ISH3 108.5 1 *>-:5 106.0 i^'sl. . 99.4 1 SS,') 93.0 1 SS() 91.9 ISS7 95.6 ! --SS 91.3 1 SS9 94.3 1S90 9:3.3 li>91 93.2 it.; M) 89.8 9.'.1 96.7 96.7 9-'.0 88.9 9.'.6 99.1 98.5 103.4 103.4 106.3 108.5 109.6 109.1 lO.'.O 100.0 95.9 103.8 133.1 149.4 190.7 160.3 145.3 150.7 135.9 130.4 134.8 133.3 119.9 1 30.5 119.8 115.5 109.1 103.1 96.6 103.4 105.8 106.3 101.5 101.8 95.4 95.5 96.2 97.4 99.0 95.7 90J ^ E J; g K _ ■ v: ti . - {i ~ ^ c ^ — 'Z. ^ ^ . — !: -S "^ c = - C c fc 5- 85.0 88.3 95.3 95.3 88.3 83.5 89.3 98.6 97.9 105.0 105.0 109.3 113.3 114.0 113.3 103.9 100.0 9J.1 lOl.l 133.3 173.1 333.3 187.7 165.8 1 73.9 153.3 144.4 136.1 133.4 139.0 139.9 138.9 133.6 113.6 104.6 95.0 104.9 108.4 109.1 106.6 103.6 93.3 93.4 M.5 98.5 98.7 94.4 ymmM 104 MOXrv AND BANKING V.i'2. II ',()}, prirc.s (hirhi,/ Ihc Civil ff'ar. It will ''^^' n..ti(rl(;.8 per cent. This extraurdinarv rise is due to tlic faet that the prices were ^aleulaied in (lci)r(- eiated i)ai)er money. AVe liave inserted 'rai)le Xo. 4 shouino- tlie a\erane prices rechiced to a 1 to the year 11)10 are ^rjveu on tlie follovvin.r pane: 1 The .l,-iii.iti(l for (• ^mnl.ark as moncv in IS.i.' must - ISfii M1.9 117.8 101 131 122.6 .M_ |S(i3 10:.' 1 148 6 103 10,-- 1(11 102 159 172 ir.2 162 12J.,> 120,3 122.6 125.8 )^»,' ^ Isiit .. . 122 r> 100 5 ^pta 1 H(i, ■) 100 3 ■^1(> 8 jp..zi mm 13C.;J 191.0 + ; 1 S(i7 1J7 9 IT ' ' 100 137 1 '1 4 ; IsiiH 11.5.9 Kid.,) 99 122 1 22.0 -I ■, lS(i<) ii:j.-» i,;3..> 98 121 123.t ' f IhTO 117.3 142.3 96 122 122.9 i^ii \22.9 1 36.0 100 118 127.0 ISi.' ] 27.2 1.38.8 137.5 i;tj.o 109 III 102 129 134 131 135.6 138.3 13(i.2 is7;j 122.0 •"' I**74 119.1 l!S-,> 113.1 127.6 118.2 90 95 126 1;^ 129.8 129.3 ISTfi lOt.S -1 ;- I>T" KU.t 110.9 94 193 127.7 1S78 99.9 101.3 87 116 120,6 IHT9 9(i.6 96.6 83 100 117,1 |s»0 106.9 88 115 121.9 IHHI lOJ 7 85 108 121.0 ]HH-3 lOfl.5 76 111 106 101 122.1 122,2 111,2 lhS3 106.0 HH4 99.4 1^8j 93.0 79 95 KIM.T IhHIi 91.9 69 99 104,0 I«H7 92.0 68 70 94 101 102,0 102,0 isrtrt. ... n.2 1^H!) 9*.i 12 99 106.1 1 «!)() 92.3 11 -.9 72 102 108.1 H91 92.2 111.7 106.1 10,5.6 96,1 93.0 7i 68 68 63 62 101 97 96 9.5 87 109.9 isni H7.6 is'iu 87.2 I««!U 79.3 isit.i. . 77.:2 IH(»(i. 74.0 90.4 61 91 iy»- 74.0 8!;.7 62 88 So;j. 9:J.7 113.6 60 91 94 - mot,. 93.3 11.3.0 70 1(H) 94 r- It ni(»i 1U.9 lii.5 li9.A 122.8 72 76 79 74 97 106 !!4 10.i 97 106 11.1 107 fr,i ■&- I!t06.. ,. iiH j H>ft7 mm 1 1 'Km ■„': ■P^ 126.5 131.6 74 78 100 109 105 lOG MOXF.Y AND HANKING l.'W. Forcio)! price ta})lcf;. —The index minibcrs given in the last three eohnnns of the tal)le are reprodueed from the most imjxjrtant lorei^n investi<>-ation.s. The Sauerheek and Economist tables are Kn<4!ish, the Soet- beer tables are (iernian. Tiie table of Mr. Augustus Sanerl)eek was pnblisiied in the Journal of the Hoi/nl Statistical Socicf//. His indexes are eonijjuted by a sim])le iinweifrjited arithmetieal average, lie lias en- deavored to arrajige a limited number of eommodities, all of whieh rejjresent raw jjroduets, in classes in such a way as to be e({uivalent to wtighting. The Ecomniiist *ables have the distinction of being the first to be coi.., led. Twenty-two articles oidy are emi)loyed in this table and the (juotations are those of a given date, either the first of .January or the first of .Julv on the averages for the year. The commodities arc chosen disproportioiKitely. tjicre })eing out of the twenty-two, four in which cotton is tlie })rincipal ele- ment. The German tablf of Soetbeer was fre(|uently re- ferred l() in the Silver Controversy in this country in IH!M;. The iiumb( r of coinmodities was over three hun- dred and the result represents the simple unweighted arithmetical average on the basis of the vears lSt7 to 1S.)«). As we have indicjited b( fore, the value of the study of the science of money and currency is the understaud- nig it gi\es ns ..f the significance of price changes and the d.ita I rom uiiieh j)rc(lictions as to tlie course of prices ^'•"' '"■ '";"I<- it is therefore important t(. get clenrly 111 mind the m;iin points of the two j)reeeding chapters. In the first j)l;iee a g,ii,.ral , ise in tli. prices of all ' "" '*•••' -"i^'» • iC't'N iiiiiir.iirs Tit.il iln rcMsiin is to be found ina eh:tnM-ein the \alueof money as comiiared THEORY OF PRICES 107 uith other things, since we know that a general rise of \ahies is c. impossibility. The rise and fall of general prices is best indicated by means of price tai)les which cnrrect the errors which a limited observation would be likely to incur. The most convenient and acceptable j)i-i('e table for the average business man i< that |)ub- lished in the bulletins of the Department of Labor. A study of j)rice tables will give the student an idea as to l!if stage of the swing at which the observed ])rices are. l.'U. Economic forces to he observed. — Observing the present tendericy of prices he will endeavor to find the reason for the tendency. lie will find almost any time ;i iiuml)er of reasons to account for a I'ise and also a number of reasons t(> account for a fall. This makes it lut'cssary for him to estimate (luantitatively ibc ))olency nf each one of these foi'ccs and to balance one against the other, in order to discover in wl ich direction \)\g re- sult of these forces tends. The most iinpoi'tant oi ihese permanent forces are as follows: 1. ProiJuctiou of ffohl. — At the ])res('nt lime it will Ik found that the annual production of ^old is increas- ing. This in itself means a lowci- value for gold inas- iiiuch as only a very small (|uantily of gold that is once lirought into existence disa])pears. Xearly all of it is idded to the stock already on hand. It is estimated that It ss than MO per cent of the gold amiually produced is !is((l in tli< arts. \\\v\\ this amount is not prrmanenlly v\iihdrawn I't'om iiionctary uses, siiuc it is so »asy to re- ihice old jewelry and plate to I'oin. 2. I'sr (if siih.stiliih s Inr uioin//. An increase in the Mii)ply ot' lint l;tcc tilt- pn.portioiiate u. )ount of ynlil uliicli will l.c- export '1 from the country as a re- sult oi' the ( flVcts produ. upon the forei<,ni'exchan^re market hy a rise ..I' prices. The first result of an in- crease of (;overnnient paper money is lii0S there was a considerahle reduction in the ••nnount of credit ..ver the year 1!»()( . uhil- the numher of hanks and the amount of cajjitali/ation a-iually in- creased. The total hank clearings ,,f the principal cities of the I 'nited .States are a much hetter index of the v()lume of credit doing money work than the numher of hanks or their capitalization. ii. roliniic of pnxlui'tioii. It is ohvious that the greater the amoimt o\' goods produced the greater will he the numher u\' hiddcrs for money, offering goods in exchange. [ 'ndrr modern eniuiitions j)ractiraily all the goods produced represent a deman.l for money," as they 'nust eh.i ige hands hcfore they are eonsimied. 'I'he jn.Min.rr nowa(iays very rarelv consumes his own prod- uct. ■ ' ■.^^ THEORY OF PRICES 109 All increase ot" [jopulatioii means simply an increase n the amonnt of ^rjods prodnced and consumed and iiuans a greater competition for the cxistin^^ supply cf money. I. E.vtrava^ant expenditures of the people. — During the tinancial difHculties following the panic of 1<>()7 a ureat deal was said ahout the efJ'ect of the i>rowini>- ex- ii'avagance in personal expenditure on the ])art of the lK'o))le of this country during the preceding lour or live years. This was held l)y some to be the cause of the stringency of the nioney market. Of course the moie extensive purchasing- by the peo- l)le represents an addition to the bidding for goods and tlie offering of money, so that we might ('(,nclu(le that a lise of prices would be the result. On the other hand ( xtravagant expenditure could not have ai)peared uidess incomes had been considerably increased. Increased in- comes are due to a greater productivity. People pro- luce more goods and hence have a larger amount to sell 'irfore tbi'\ can realize their income. This enlarged production of goods causes a l)idding for money, whieh I Dimtei-balauces the eidarged bidding foi- goods, that Inllows immediately upon it. Thus the intluence upon pi'lces is diminished. 1.'J.5. Saving aiuJ investing. — If instead of si)ending Mieir incomes in living expenses tjiese people had em- i)lovcd them in ativ other wav excei)t hoardiu''- cither ' • • • I r> lepositing them in banks or in\('sting them in securities 'lie |)rodueing power woidd sim|)ly have changed its •nvm and !!!st.;!i! (it' causing a bidding u}) of pricci^ of <•on'^umpl ion goods would ha\e iiad :\ sitnilai' cfVeet in itinneetion with production goods. Mone\' deposited I! hanks or invested in seciuities is sim|»ly turned o\cr to industrial and business enti-rprises. when it is spent for (');» 110 .M()M:Y AM) HANKINC; IIH« ^^oods, thus having the same effect on t!ie general level of prices. The effect of the expenditure of incomes for con- sumption ooods instead of for production goods has no immediate effect on general prices, hut it has an in;- j)ortant effect upon the future production of goods. KxjKTided upon consumption goods, the effect is to di- minish the supply on the market and encourage indus- trial activity to rcj 'ace them. 1 f incomes are generally saved and invested they lead to a considerahle enlargJ- ment of the productive capacity of industries and even- tually lead to an increase in the quantity of consumahlc goods to he marketed when the factories and machines and equipment hegin to run a product. The deductions from this are that extravagant per- sonal expenditures tend to raise prices of consumption goods and to retard future over-])ro(luction. .Saving and investment are lar more likely to he the immediate cause of a j)anie and depression on account of the larger (luantity of goods upon the market after the production goods have l)een installed and before the consuming ca- pa<' ty of the country has caught up with the productive canacily. A much more reasonable cause for a panic than ex- travagant expenditure is to hv found in the unreas-na- i)ie expansion ol' credit, which is likrlv to he hn.uglii about by rising prices and larger profits which in.lmv men to undertake productive enterprises far in excess of the present consuming poutr of the people. The in- creased bidding for money which such nvrr-jiroduction Inings about gives the imjjulsc to a cumulative .leniand t'"i- money and a rai)id rise in its value compared with ..It,, .. ii •., ' -.■■;!ivi liiiiigij. THKOHV OF i'H!( KS ni The rule therefore, ui)()n wliich prechetions as to the t'uture course of prices can he made is this: Do (\iititinff and future cotnlitioiis, tahcit as a rcholc, •.ttrraiit Ihc conclusion that the hiddinii; for )iioiu\// or Ihc offering of goods' xcill t>c stronger than the offering iif nunicy and tJie bidding for goods? CITAPTKR TX DOMESTIC AND lORElUN EXCHANGE 13(5. liclation hiixcccii foreign a/ul domestic ex- cJuni^c— in a precedino^ cliai)ter mention has been made of the proeess hy wliieh the o(,I,l jjnxhieed in any })art of the world is (hstrihuted thronnhont the worhl. In the present ehapter it is proposed to study a little more closely the details of the proeess of the distribution of money and the methods of makiny- payments between distant points. The subject of foreJnn exchanoc is usually re/:.-ar(led as excecdino-ly eomplex and teehnieal. The'reason for this is tjiat some of the fundamental prineii)les are but little understood. The prineiples of forei^-n exchan^re ai-e exactly the same ;is those of domestic exchani>e. the oidy diirerence beino- that there is in foreion exchanoe the added element of translation from one coinage basis to atiother. 137. Painncuts J>// dikuis uf fmlii Imlunct's.—'Vhc liandlino- ,,f actual currency in transactions of any size. even Ihounh the currency be in i)ai)er notes of " larije det.ominations and the transaction takes |)lace loeally. is incotivenit-r,t. It is one of the functions of bauks to obviate the necessity of makini;- payments in currency, by means of a cIk ckin,..- system. 'tIic whole i(ra of makino- |)ayi.ienls and settlino- accounts without !l <■ u'> ■ of cash deixiiijs unon the f.';! ! I';;! !!!•..-!. v .-•=.:•»::;=■. ..:. .stances a creditor is just as willing- ilii lo leceive m pay men 1 UOMKSTK AM) FOKKKiN I.Xc i i.\N(;i: ]i;) llic ri^lit to (kiiiniid itioiuy as lii' is to rttfu c the cash ilM If. Ill cases of lar^e Iraiisaclioiis il wouhl he coii- sulei-ed a tcreal hardship on thi' part of the rccij)iciit of the payment to he re(|iiire(l to accept the eun-ency. i;JM. Funclidii of I lie Ixnil,' iu ind]yiiiL' that a hank in Auroi'a. Illinois, has on ({(.'posit ^1(),()()() \ufh till' l-'irst National of Chica^i). Let ns su|)[)()se that an Aurora niannfactun r has sold stoves to an (a--ti'rn dealer and ia^ reiH'Ivi'd in payment a check for ."^l,!)!!!) on the Corn K\- < hange hank of New Vork. He will deposit this clieck in his .Vuroni hank, uhlch will send it to its Chicairo c'orre-.pondent, iiid therehy increase its credit halance to S] l.OOO. Thv ('hica<^-() i'liik will send tlu- check to its correspoiid( nt in Ne« Vork, and n increase its ciedit halance in New Wnk hv ^1.000. Bv an inanu'enient with the l-'ir.' t National Hank of Chic/i^'o the Auroi-a l);ink i> ahK' to sell drafts on the Coi'n I'Achanere of \i\\ Vork. u-in^- for the purpose hiank draft^ furnished hv the r!i--t National. It is (|uite possihie that on the same dav a ;iierchant in .\nrora, who has hou^ht oi)i)(Js from New Vork, 'ill call upon the .\urora hank for a draft on \cw Vork. Ho ly not want a draft for exai'tly ."^l.OOO. hnt that does not mat- ' r. The Aurora hank is ahle to sell hini a draft to anv amount up to .*i trade relations with all })arts of the ■■"iiilrv. hank> e\ er_\ \\ here are u-ually ahle to sell drafts on that: I ;tv without helna' comi)elled to ^hip currencv. New Vork exchan^'e is u--ed not only for payments hetween lU) MOM'N- W!) B.WKING New ^ Mik :r.\i\ ()tli( r p.irt- ot' tlir couiilrv hut aNo for pavimiiK lictwirii point- in the ruilid Stales outsi(!c of N.u NOrk. A iiiJUi livinj^- in Hiill'alo who owes .<1. ()()() to a man in New Or- li'jins can hot pav t hr dc ht hv remittin>>- ;i (h'aft on New York Citv. 'I'his mrthoil is t!ic one usualiv cniploved, for Buffalo hunks inaintiin no liakuu'cs in New Orleans, and so cannot sell (liMfts on that citv. 'J'hey can, however, si'll a (h'aft on New \'ork, anil that will Usuallv he accepted hy New Orleans hanks at par. Wluii the n.aler takes into account that New \'oik diecks and drafts are e\ery day l)elnlier 1/ank it will be ncctssuiy to make a shipment of currency. In case a country ])ank has a dej)osit with its Xew York corresjiondcnt mIucIi it considers lar<>'e enouoJ! it will accept dejxjsits of checks on New ^'()T•k only uitli the intention of makino- slii]>merds oi' cash to reimliurse itself for the sums jiaid out. The shijjmerit of currencv involves expense and it i^ (pn'te likely that it Mill not acce]n suj)LJ!un)us TNtw "I'ork exclian^e uiiiess it re- 1 Ji Ml and ('uiTi'iUA'," pp. 7;»-bO. DO.MKS'riC AM) FOUr.KiN KXCIIANdi! 117 c.ivcs a i'vv which will cover the cost of coUcctiiio- the same in cash. 'I his cost ,lej)e[uls upon three items: first il;< ( xpress charge, second insurance, and third the loss if intefcst. The chai-^^'c for trans])()i'tation is usually (Minliiii((l with the chai\u'e I'or insurance hy the expi'css (iiiiipany. 'I'he moment the \c\v 'S'oi'k hank delivei-s ll:i' cash to the express company for shi|)ment to the (Mimtry hank upon its order it ceases to pay interest iilMiii that sum. The counti-y ])ank therel'ore loses the interest upon the same until it receives it and uses it as a hasis for interest })aying loans. II.'}. Cosl of ciirrrnc// slii/Jnwiit.s. — The cost of cur- i' iiry shipments l)etween New \'ork and Chicago is in the neighborhood of .50 cents |)er thousand dollars; be- i\\een St. Louis and Xew York it is (>() cents; between New- Orleans and New York it is 75 cents, and between San l-'i-ancisco and Xew York it is .$1..50. \H. St'ftUmcnts through the stih-trcasurics. — The r »st of shipping currency from one city to the other is tVe(]uently saved to the banks by the Treasury Depart- I'lc ul of the Government. For a good many years pay- ments to be made between the Treasury at \Vashington and the sub-treasuries in the various large cities were all conducted by casb shipments. It happened \ ei-y fre- quently that at the same time that the treasury was for- warding consideral)le sums of cash between two cities, the banks would be shipping currency in the ()p])()site direction. An ingenious cashier in Xew Orleans early in the seventies suggested to the Secretary of the Treas- ury, McCullough, that a saving both to the Government :iMil the banks might be effected if the banks when they WKjlcil to tr.'U!S!l!!t !>>.f!!l!'\' to ;• clfv !!! \vl>.!''!! !! mib- treasury was located would asct-rtain whether the Gov- ernment at tlic same time did not w ish to send monev in Mi -'Wf- 118 -MONKV AM) TANKINd the opposite directioi!. IT this pro\t(l to he the case it wo'ild he j)rofitahl(' to the hanks and to thi' (ioverninent to allow the hanks to deposit tlif inohty in the Treasurv and reeei\e an onkr iii)on the 'J'reasniy in the other eitw The Treasury otliee in the first city would receive the currency it iv(|uire(l iVoni the de])()sitin^' hank and th" hank in the otlici' city would recei\i' tlu' eurrencv tVoni the 'I'l-casury instead of tVoin its cori'cspondcnt and ^ll cost of transjjortinn' the money would he eliuiinated. 14"). Utile t)f A'ci.' l'n/7.' cxv)iiin^c, — Suppose tliere was a <4rr:it deinan^' for Xew ^'ork exchange in any city on account of the hea\y hills of iiierchan(hse faliiiiu' (hie at some pai'tieidar season of the yiar. 'I'hc hanks will diseo\er that the demand for Xew ^'ol•k exehanm' far cM'ceds the supply of checks and draffs deposited hy customers. 'I'heir di posits with their Xew N'ork cor- respondents are reduced and in order to continue sell- in,t4' Xew ^'ork exchanu'e thty must ship currency to that city. In that ease Ihey will he justilied in cliar^- in^' at least .')() e( nts pi-emium for every $1, ()()() ol Xew N oik exehanue sold in ordei' to i-eimhni'sc themseKc'- for the actual cost. Competitiou hetwcen the local hanks will not permit a much liinher chai'^e than this. On the otiiei- hand if tlu rtciipis >ih|e i'nr (Avli.uiac on X( w ^'ol•k in San DOMESTIC AM) FORKIGN KXt'IIANGK 119 I'ratu'isco to he sold at a preniiuni of $1.50 or to be (.■H'eied at a (liscoiint of the same amount. 14(;. S'ifj;nijic(im'c of ndcs of domestic twchdugc. — 'i'hc premium or diseount on domestic exehan^e is ])uh- lished ill the pririeii)al dailies and is nseful to the husi- iii'ss nuui as indicating- the volnme and dii-ection of trade ;it any ])articular time. An unusually hi^h premium on New York exchan<^e or an unusually j)i'()lon^e(l ])re- inium will indicate that the purchases of local merchants lias hcxti unusually heavy in that year if tlure are no unusual transactions to affect the; prit-e of exchange. Why does it not happen that under certain circum- stances a communitv mav huv moiv aoods than it sells during' any ])articular period and thus he forced to j)art with all of its currency in settling the halance:' Since * ach trader is simply looking out i'or his own private jM-ofit and does not concern iiimself with tl;e (piestion of the amount of currency there seems to he no reason uliy a comnumity might ji(»t he drained of its currency. This hrings uj) the cjuestion of the halance of trade, the jMineijjles of which arc the same whether thi' exchange of goods is l)etween two sej)arate nations or hetween two localities within the same nation. Su])pose foi" any reason that there should he an un- usuallx hea\ y puichasing of goods hy the merchants of ;i western State in any ])ai'ticidar year. The merchants would huy from the hanks N'lw N'ork exchange with which to j)ay their hills. The lianks. ai'lei' lia'.ing ex- liausted their credits in \ew ^'oI■k would hi oI)ligcd to hip currency in oi'der to co\er the drafts on New ^ lu k sold [,, tin merchants. ■nil :'%:i I rii'i'i' I*, till t* 'iii\ iriitii-«ii' (li!i) •! «w till) 1 1 1 1 II it I' It ill ill >.. t 1*1 1 \i It •! I A \\^ nuMu V or 'm--Ii a^ m rcNiiH of Its |Mir<'lwi''(N nl' intods f'roiM JII W 1J>() MUM:V AM) HANKING otiicr rommnnitli-. No matin- li,,u fnrlv Cliit'Ho-,, aiul llio coniilrv tnl:iit;u-\ to it iiia;, puirliaM' o(wi,is from lli<-' K.i^l. thoM J)^ll•(•|l,■|s(^ can iir\t-r mak<' aiiv xTJous drain upon the ca^! supply of Chicago. N,, matter hou rxtravaoant the jicople of the Wot may he, tlirii' puivhiisis of ca4rn, ^ood-, can nc\(>r In ^ivatlv in cxccvs of tlicir salo to eastern customers. Sliould I 111' people of Chicago for ( \l raordinarv reaM)ns at anv time in • TcaM' their ))ureha-.es from N. w York and other eastern cities, the Iir4 etfVct in Chica^io uonid he an increase in tl:e demand for Neu York exchange and in l»aiik sliiprneiits of currency fro m Chiea-o to Neu York. Tlie loss of currency in Cliican-o, Miice it N^ouid rrduc, the len.lin- pouir of Chica-o hanks. «o„ld tend to eausc a ri^e in the rate of inter, st and a ri~i in the \ahie ,d' money. 'I'he pi-uvs of certain co ditie. uculd he-in to de- •■''"•■- ""' "'■■■'I' i'esi rate ris. s the\ are uhli;;ed lo ..mtra.'t ""''■ ••[•"•■'''■"I-- Chi.'a-o uonld ihws lieconie a o(„.d place to I' 11(1 ui .■■lid als,, I nnod place in vJiich lo luiy stocks .ami i)onds, uheat. ,11.1 nth, r spcculativ,' coimiiodit i, >. In ,,th,'r vv(,rds. li,,. valu, of m,,ii, \ uould lis,, in Chi.,,-.,, an. I p...p|,. m ..th.r p .rts "*' "" <'"iiiitry «,m!d iiier.asi' th, ir |.urcliasc.s in Chic.ao., |,,,ar- k.ts. r.milliT'n' Neu ^■.,|■k .\.'han,-v in p.iMii.nl. Th.' r.ader must 11,1 suppose th.ii Ih.is,. chane.s in pn.v ,m- in the rate ,d' intuLst 1 ,.l h,. so -r, ;d ..s lo.diract ;;cn. rai attent i.ni. N. \.r- Ihek'ss it cum.. I h. .i..uht,.| Ih.d such chaiio-. s d,, i,,k, |,|ace. and that as a r.sult the sales ,,f ( hica-o to other parts ,,f I h. nnui ''■.^ •"' ~" ••"i.liisl,.! that in III,. loiiM rt.n t|i,_\ furnish .i supply of New York fxchaii^i' e(|U.i| to tl . .1, muid. 'I'hus ;i |,;,pp,ns throuuhoul fho country lliat in the .-..urs. ot .a \, ar the d. hts nf Iv. ry coniiuuuify .tr.' always practicajh lialaiiced l)_v its cndits .ni a. count of sal.s. .,. tint l.irM.. ship III. ?its nf -Tri'iicv are iieyer neressnry. In.i, . .k it' .,,,.• M,,,..,f. ■!.•.. •uid li inkiii;^ svst..nis w. r. p. i f. .1. m, shipm, nt .,t cm.t, iicy from DO.MKSTIC AND FOKI'.KIX KXCHANGi: 121 mil- part (if the louiitiy to anotlur would Lver occur a> a ucccs- •arv result of trade transactions. .Money or currency would (iiily he .shipped to a connnunity as a result of an increasino- netd \'iU- it as a medium of exchange or as a hasis for the expansion 1 ! hank credits. In Canada, for examj)le. on account of the elasticity ol' its hank note circulation, >easonal variations in the (It iiiand for currency are easily proxided for by the local hanks I ^ .1 tl U'U' Uranches. . 1 I'T. 2'Iic clctiri;'^- liousc prinriph'. — Doiin.'stic ex- change as we luive seen, is simply a hanking deviee to avoid the iinneeessarv sliipnient of nionev 1)V settlinijr hal- .ihces only. The |)rinei;)le is e.xaetly the same as that DM whieh elearing houses are based. The hanks in any diK' eity find at the end of the ihiy that they have re- (•(ixed from their depositors a great numhir of eheeks rawn on neighhor'ng l)anks. Hefore the days of the 'raring house eaeh hank sent a messenger to all the .iiers with the items against tliem and reeeived the easli ill |)ayment. At the same time that each of the banks \\(i'e seiKhng out messengers to make eolLetions tlu'V wvvv |)aying eash ovei' tlu' eountcr to the messengers ol other i)anks in settii'ment of the checks aiiainst them. l>y ha\ing a common place of mtcting tlu' mi'ssengers "Mild deliver the items to the debtor banks and could irii\c the checks lepresenting tlii' credits i,\\\v them all il OIK' time and could easily figure up the diircrcnce be- lu( ( II the (kbits and the credits. .Settlement could then '- made by payments representing the dill'iicnces which "ere likely to be less than 10 per I'cnl of the total trans- :!■ lion, tliiis '^.-ning the IsMMdling of '.»() per Cent ■)(' the cash represented by the checks handled. The dealing house |»iiiieiple li.is no! yel been appli«'d Mi i IS lullcs. ,\tt nf in th( setlliiju- of aci'ount' •tw ecu ,Im| iliMiii. " .Mi(ii(\ Mihi ( iirriiuN, s i sv. lati MUNKV AM) HANKINC; banks in different localities. The forwarding of the cheeks to a central point, together with other difficulties which will he discussed later, has up to this time made the establishment of a clearing institution for out of town collections an impossibility. The same result, however, is accomplished by the custom of country banks keeping balances in the city banks and drawing against such accounts instead of shipping currency. 148. Si'tflin<^- hdUiucts h/j usf of (77yZ/7. Methods have been found for eliminating tiie shipment of cur- rency, even in order to pay balances. IJanks whicii be- come debtors to others through the settlement ol' accounts may I)orrow the balance due from tjie creditor bank and i)ay interest thereon. 'I^iis of course is : )t a final settlement of (he balance, but simj)ly postpones the .settlement, yet if in the near future the balance happens to iim in the op|)osite direction the loan may be li(|ui- dated by a credit balance instead of by the p.iyment of cash. 1 !■!). (iohJ the infrnidfidna! medium. In the case of domestic exchange ultimate payments may be made iti any form of cm rency but in tiie settlement of balances between dilferent nations gold is the only acceptable mediiun. .Since m,)|,j is tlu- ultimate basis of credit in all civilized eiiiintries, and since a \olumi' of cin'renev from SIX to t(n times its amount is erecttd u|)on it. the niovmients of noj,! fnmi mw pl;iee to another are of \astly more impoitance than mo.rnienis of any other form of cash. Ivxports and imports o| o,)|,l in and out of a country are likely to disturb the money situation ;in(i to P(C(ssitate lVe(|uent readjustments of eredi! eondi- tions at new rates of interest. The movements of gold i<'it i^^ii ixeiiaiiL'e opv laiioiis. and il is «i I \_ lilt t t -^ 1 1 I t t f r DOMKS'riC AM) VOHKKIN KXCHANdE 123 this fact which causes hiisiness men to scrutinize so carefully daily ijuotations for foreign exchange. 1.50. Finiction of ihc dealer in foreign exehange. — 'I'he service to the business coniinunity of the interna- tional hanker who deals in foreign exchange is not only that he does away with over 90 per cent of the shipments of gold which would otherwise he necessary, and thus causes a great saving of expense and risk in settling commercial transactions, hut of far greater imi)ortance is the service that h( renders in steadying the credit con- ditions the world over. His function is more than to eliminate the shipment- of money l)ack and forth to make payments -he still further decreases such shi})- mcnts hy borrowing and lending in foreign markets, so that the final and a])solutely necessary shipments of gold are retluced to a very low minimum as com})ared to the total amouJit of Inisiness transacted. l.")l. KA'dinple of foreifxn e.vehan^e. — Let us take a tvj)ical case in foi'cign commerce and show how the in- ternational banker facilitates the transaction. Armour vV Company receive an order frun; a liritish dealer in Cleats for a shipment of beef. After the beef has been loaded on the cars Armour \ Company draw a draft on !he Knglish consignee which in effect reciuests him to pay to the Chicago National Hank or anybody else disiunaled bv them, the sum (d" 1: 1.000 sterling. Armour \ Comi)any might have waited until the l''.nglish customi-r had received the meat and remitted to them a ciicck which .\rmo>ir \ Company could have collected Ihrough theii' bank. If this u ( rt Ihc I'Ustom Armour \; Com|)any would be iiciuiicd to tie uj) an rnormous amount of capital in this export business. It IS the aliiiosi universal itruclice of British business men. ^^^^^gmm ■:sf vn MONEY AM) IJAMvING lunvevcr, to draw upon tiicir customers for the amount of o(,n,ls sold as soon as tlicy are shipped and the American exporters find this very advantageous because they can reahze the proceeds of a sale of goods very i|uickly and it reheves them from the necessity of b(/r- rowing so mucli working capital. The Chicago National Hank is wiUing to purcliase or give crefht to Armour .^ Comj)any for the (h-aft im- me(h"ately. aUhough it cannot reimh'urse itself for sev- eral weeks uidess it sells the draft outright to another hank, in which case it simj)ly shifts the hurden to the other !)ank. It is the business of a hank to provide com- merce with working capital for a consideration; in tiiis ease the consideration comes to them in the form of a discount which they deduct from the face of the (h-aft in jjurchasing from Armour.^ Company. l.VJ. nini haiihir.s arc tf//////- /o purchase foreign (Jrafts.~Thv hankers arc willing to purchase the draft, even though they have never lu^ard of the Knglish firm on whom it is drawn, for the following reasons: (1) The reputation of Armour \ Compai.v assures them tiiat the (Ira It would not he drawn utd"ess a shipment of merchandise had been made. (•_>) Armour .V c"om- pany as drawers of the dralt under the universal law "I" negotiable instruments, endorse the payment of the s:ime and may be held for payment if" the Knglish drawe( fails to accept it. (.'}) "in most cases there is attached to the draft a negotiable bill „f lading which vests the right to receive the goods in the jxissessor of ""' '"II <•'■ lading. 'I'hr Knglish bank to whom thev l)avc assigned the draft will n,,t deliver th- bill of huhng until the consignee has accepted or paid the til ai t. ( f ) lo still lurfher guarantee the !)ank.s •.igani->t loss there is attached to the draft beside the bill '«^ DOMESTIC AM) FORKKJN KXCHANC.E I5i5 (»r ladiiio- an insurance policy which entitles the banker o receive reimbursement if the consionment should be damaged or lost in transit. There may also be attached to the draft certificates of Government inspection certi- lyino- the (juality of the meat and also an inxoice of the shipment, hy,i. Progress of draft.— These safeguards arc so -ifective in ouaranteeino- ])aynicnt of tiie draft that it is extremely rare that even a (hspute occurs in trans- actions of this kind. The Chicao-o National Hank, if it has no corres})ondent in Enoland. may sell the draft in Xew Yiu-k. The Xcw Ynvk bank w ill send the (h-aft to England for collection and credit the same to its ac- count. New Vork banks are always willing to j)urchasc these foreign drafts and to create credits abroad in Older to be in a jjosition to sell foreign exchange to importers and oth.ers who are re(im'red to make pay- ments abroad. The foreign trade of this country "is so huge that there is always a demand as well as a suj)- ply (d" foreign exchange. The international l)atiker who (le;ds in it is exactly like a merchant who buys and sells any commodity. 1.54. Quotations for foreign ear h a nge. —The (juota- lions for sterling exchange are the prices at which the light to receive certain sums in England is bought and ^nid in Xfw ^'„,•k and varies like everything else ac- "ifding to demand and supply. 1.).'). The pound sterling.- The monetary und of I'.ngland is the pound sterling, which cont;iins IJ.'J -lains of pun gold. Sincr dui' monetary luiii is the •i"llar. com|)OM'(l of •_'.'{.•_'•_> grains of gold, it is easv to '■alculate that the English soxcrdgn. uhich is the name if the coin containing a pound stei ling, is exactly e<|uiv- ilcnt to $f.S<;(i.*). In otjk-r worus an Knglish sov<'reign .>^^ :i ' mv.nm t \im l^() M()M:V AM) ILWKlNCi c'Uii he iaUcii to a rnited Stales mint and rccointd into 1.8«Wi.) AiiRiican <4'ol(l dollai.s. Tlicrc is a «ri-eat difrcrcncc. however, between the li^dit to receive gold sovereigiis in Knghind and the })()ss( ssion of gold sovereigns in the L'njted States. A gold sovereign in England will not pay a debt in America unless it is first imported into this country and coined into legal tender. Therel'ore it is worth to its American owner .$4.8(;(>.), less the cost oC bringing it to this countrv, mdess he c-an re.ijize n|)on it ])v sellinu' the right to receive it in Kngland to some one who wishes to use it there. l.'if). Cost of Shipjlimr ;1, {)()().()()() 1,, u-,,l,| from New York to London weie furnished hv the repriseiitat ive of one of the largest New York bankiiio' houses: ln\(>tcd in fine I)ars, L':5.;2f^O,OflO pfr $1,()()(),0()0 A.s.->ay office premiinn on l)ar-- 1 c(iit> per SKIO. . . . }■()() Freiojit rj '.i^> per c. nt l.r)()2.50 Insuranci' 1 Hi p, r cent (J^o Packing an to dtal, usuallv pav> a fraction less than this sum, thus savin;;- its( If from lo^- of int. rc^t while the huilion is being cointd. It i- assumed b.low that tiie H.mk pays 77s. lOd. i :■-•-' -^ , 4H,;J7r) oz. fine eipial .■)L',77^.7 o/. 91 (i U •^ fine. r.-")') DOMESTIC AM) FOKEKIX EXCHANCi: liiT n2,772.T oz. at 77s. lOd t;,'2().')J57 i Deduct Muidrv rxpoiises 4, Not receipts in I,oiuloii £^205,370 Cost of soverei-rn ( 1 .()()J2,()7r)..') -;- «();),;J7()) $4.88^2 -Mint j)ar in the I'liited States 4.8665 Cost of sliipineiit jk r sovi reifrn .45 .0157 No loss of interest is included in the fore<^oin<^. 'I'he New \nrk l)anker uho furnished the finiires In Id thai no sucli item «as iiiv<)ivi(i, for he >old sterhn^- e\chan;4e as soon as he made -hipment and so was never out his money in consecjuence. If wo nil hide interest, we raise the cost of shipnuiit to .'i^.()li)7 per sov- t reign. ^ 157. The minimum ^old point for sterling exchange. — Calculating*- the total cost of shipping (rold between America and Kurope at the lowest fionre oi" two cents pd- pound sterlino-, it is easy to understand why .$4.8405 is called the niininnnn gold j)oint for foreign exchano-e. If there should he an extraordinary supply of foreign Inlls I'or sale their price under normal conditions could never go far below this figure because there would al- ways be some international banker who would be wilHng til pay for them the moment there was a?iy profit in Inlying them, for the purjwse of importing the gold, iiit.r they had l)een cashed in England. This mini- mum price does not mean that the value of forciirn bills is an exception to the law of supply and demand, but that when the price falls below a certain minimur 1 there arises automatically an u?ilimited demand. i.>o. x^i r!( AM) roui.K-'^ !:\(!!.\\(;i: vv.) Miml rate il' tlic rf.sLive in iUv H:ink ol' Eiiglaiul were ■ iidaiiyci't'd. (.•{) The (linieiilty in uetliiiL;' ^old for exi)()rl. Tlie ImIIs eould l)e j)aid in notes and altliouLiii the Hank id' r ii'dand must redeem all notes when asked to do so, 'i\ las the I'i.ii'ht to ])a\- out coins of ks-, than lull wtinlii and make a (hffereneL- of a itiiI in the I' in t!ie protit of the exporter. (1) The hi^^h |)rie<.' of n'old hiihion in London. To ,,\oid the loss incidental to shipping' coins, the at)i'asioii ;ind the li;L;'lit weiuht, bars of ocjld must he pui'chased ill the market, (iold bullion is marketid in London as ;i commodity hut with (ixed limits to lliictuation of price. (.)) The premium on currency in New ^'()rk in Xo- \ I'liiher. 1 1)07. (hie to the susj)ensioii ot" cash j)a\nients l)y 'he hanks. !<;{). The gold iiKirhct.^-'Vhc hulk of the in by comparing- iMites and (juitt' a xai'iety of interestin<4' situations may f'e (hsclosed. Thei'e may be a big' amount to offer and a few small buyers, or vice versa. Sometimes the com- petition for the gold is \ ^ry keen. 'i'lie Bank of iMigland is recjuired to pay on notes !or uold (to buy gold) at the rate of 77s \h\ |)er ounce 'lid this fixes tlu minimum price. On the other hand, I'lc Hank Is under Kiiai obiii^atiiin to irdit-m its nolrs lor gold at the rate- of 77s 10' ._.d [)er ounce. This ap- iH-ars at first si^ht to hmit the srliinu' price, but on ;i('coimt of the right of the Hank to pay out light w tight coins for the notes the maximum is raised to practically ■■^m^ 130 M()M,^■ \\l> HANKIVc; 7Hs per ounce. Tiicrf is a tiu-it iiiKlcrstamliii^- that tlu ]5aiik is lo liavc |)ixtV rcncc wluii il is willing- to pa\- the best i)ricv ollV red hy any other l)i(l(ler. The fact that the hank of Falkland must buy and sell all the ^old oilVred at the jjriees fixed hy hiw. makes it very ditlieult for Knnjand to hold her supply of ^old when other nations are hiddinu' hiuh for it \.< maintaiii- in^- hi^h interest rates. Kn-^iand for this reason is called a "fnc"" oold maikit. The Hank of Kim-land exercises control over the u'old su|)ply hy nianiijulatin^r the rate of discount: a rise in the I'ate dise()uraland .\as held for a lonu- time at (» per cent, customers of the F,ank of France could always get i unds at W i)er cent. The Hank of France has a monopoly of note issue, but it is not compelled to redeem its notes in gold. \V'hen it desires to j)r()tect its gold reserve, the liank of France refuses to ])ay out gold in (juantities for export except at a premium. This ])rcmium is never so high that would-be exi)orters are induced to gather up th" outside gold at considerable ex])cnse. but it is liiLdi enough to discourage knding in foreign markets l)v l''rench capitalists without interfering with foreign trade. Proximity of the <|uotatlons for demand sterling to le minimun. or maximum gold [joints indicates an ap- tl i)r)Mi:s'rir and iojir.K.x i-.xt iiANc.i; in iii(»;tfliiii^ r\|)(irt or iiii|)()ft (if ^old. Hjol! (luotations iiMlicalc exports, whik' low (|iioiations itidicutc iin])orts. !(■.•_'. (i(,l(l •v////>//'r/;/.v. SliijMiitnts of ^^old intn-f'ere with the basis of cirdit aiiicrci'.-~\\: is n well-known fact that aecordin,u- to the ollieial Hniires i>iven out at the C ustom House our ex])orts considerahly exceed our im- p'lts. The fir\risTi(s oi' i()i!i;ic;x tkadk oi- imti;!) stapes.' ■|"|'l^'' niniitli-. Total T.,*;.! i'.mvss of ' iiilinjr.luiif.id. Import-,. l'',\|)(>rts. I^lxports. '"" S sio.nn.isi .Si.iiOi.isn.os? i?,u),.)H.s!)8 i'"'l S.':i.l7,M(i:> l.l>7.7(il.!)!)l (idl- :,!) ' S 'li '''•'-' !)(t;i.;i.'(i,!us i.;i«^i.7i<\i(ii V7s.:i')s,k->;5 ''"'•5 l.O-'.').'. I!'.-';'.T l.i.'O.l 1 1.(i7!) S'U.l-'J.U.' I'""- !>itl.():.r.;',71 1,M1().8.'7.J7I .Kiil.T;{!1.<>i)() ''"•■"' I.117.)l:i.iiTI l.jl8..j(il.(i(i() 4(II.()IS„jli.> """• 1. -'.'(;.:,():!.-' I J i.Ti:{.s(ii..,)()() .ooi.^dj.o.u I'"'' l.CH.lJl.i ?:> l.sso.s;, 1.078 U(i.iJi>,(i.->;j ""'"' i.i!)i.:ui.7iij i,S(i(i.77:{.:iKi (iii(i.i;ii. .•.:!. !'"»!> i.::ii/).>i)..'n i.(i(i:}.()i 1,1(11. :v>i.()!)(i.sHo '''"' 1..),>7.HI!).<)SS 1.7U.i)Si.7.'() IS7.1(il.7:i.' '''II l..').'7.Jjr,, ]■!.-, :.'.()1!).:{J(I.10>) ,),'\().()()().()()(). \\ liilc our 'xccss iiiipdi'ts of Liold wwr $70,000, 000. In thcytar 100.) our fxct ss of ( \{>oit.> was S< I-OO.OOO.OOO while we aciually (Apnit.d S.'JU.Ooo.oud worth of uo!(L 'I'hc liuurrs for tlic ( -■ poi! and mip'oil of ^ ciniil ycai' a\c'r;i,m' nl' iinp.iils is souk^'. hal hiulis r than in prc\ ions years. M(>\i',\ii:\ r oi (■.(»! I) ro wn i kom tiii'. r\"i!i:n -;r\ri:s I'v\ clvi' iM'inlli^ 'I'lital Tot.i! I''.\i( >^ i>t' (■'.m'css iif ( nditij: .Iiiiii- J1 .*;tS,!M,>.0(),i I'lKi <)(i,.'ji,ri« :is,;,7:!.;.!n i«,)7,'ii^.i.i'> I'lor m.Mo..M!> .".I.:!!)'!.! ;<( (i:{,i i i.o; s Ml IS ; .. I is.:!:t;.:i.'i 7.'.l;{.'.'t.'l 7.>.!in|. iu; l!li<) I l,.!> '•. I !s..-,(i:{..M ;, :.•).. '.';i.:il(i "111 ;:!.!. nt.iiit .'.'.i(»!).:{ .>l.()!>;,:i(io 111!.' |s.;i,{ii..>(iii )T.:i>' .s s.;J<)l,s|s Kil. I ii\isihlt' iliiiis (if I'oriiiiii !i'(i(lf. ]\\vi\ thon^'h we do not n'ct paid lor our ( \ct ^^ of txpoiis in Ljiild, n< \ c!'!!)! less wi ai'c ])ai(l Im' tli< ui in sonic lorni oi- oilier. The tim.res ot' inip.H'ts .■tnd exports include only the noods wliicli p.'.ss throu'di the ( iistoni I louse. 'riiei'c are many kinds of tr:i l^actiolls re*|iiirini4 |'ay- ni' Ills ol' iiione\ which are ne\ er it ported ;it the C'us- toiii House at all and \ii Ihtir eil'cct upon tli.' trad( halanei' is the same ;is nu rcli;indisc. In tli( last d; cadi tile capital of the worhl h,is hccome more ;uili>tW 111 jtlll* lllill;i.jl*j«><.J 11 Ik. l)().Mi:sri( AM) lOKKicN i:\( ii.\N(.i: i;5;i s;ii(l lli;ii tlif l;ii-i4(.r |).ii't of llic (';ij>ii;il iisrd to i iislrucl. (lur railroads IkToiv ISSo Ik1oii<^(.(1 to Kii«4laiul. Aimrii-aii stciiritirs arr so fxttiisivfly dealt in on the London cNclian^uv that the closinu' (juotatioiis on the London |)ti((s I'or them at Ihe end of the day. uhieli coiiK'. dne to the difl'creiiee in lime, at the opening' of nwr own e\ehan;^es in tlii-^ e(inntry. Ii;!\e a!i itiij)ortant ( tl'eet ni)on (|iiolations lieii.. 1»;.*). M(i:'t. lilt Ills of cdjjildl. — In I'ceent years the well- known thrift of the l-"reneh people has induced our linaneiei's to make nnnsiial eH'orts to estahlisli a mai'ket for eel-tain American seeniitics in Paris. 'I'lie Pennsyl- \ania Hailroad Company sold a very larue is^ne of !:onds in that eonnti'\- and other lai'<.ti- coiuni'n^. notai)ly tile Lniied States SI til C'oi'poiation. ha\ c from time to ,iiii(. heen eaii( il\- se-kinu Ih pri\ ije^c of listm<^' their ,( cin'it it s on the I'aris l!our^e. '11; I 'nit((l .Staus 's jusl cominu' t . he a market for r(,r( ion si'cnrities. 'I'ne eliii f foreign secni'ity which is it |)rest lit (jiioted on our t xchanu'c is the Japanese war honds. I*oi-tions of bond issues of .South .\merican st.ites. .v.ueli as I'ciii and Chili, are occasionally rdlotted lo American hankers to he disposed of in this eounti'y. The moxcment of these securities to and fro is the inosl potent cause of Uuetuation in the forly the first lliiuL, in the eountrv to feel the eireet of the tendiiiey to higher price-., cau^iil li\ an inei' .id amount of money or iredil. .\ \(i\ small rise .., die ipiotations of stfinities is ■.uilicit nl to cause i-onsideral)!< m lliuL; of thtni in this niarkcL which has a t( ndency to create a d( niand foi- foirigll e: 'iiiUi^^'e to |»a\ for them. Ih nee ;i ris( \\\ Ihe <• I . ■ 1 . .• ! 1 ■ 1 I j»l !(•(■ Of C Xiiliiii ^;i iiii i i i < \ j >< n i > > >i ^ m i .i i i 1 1 n u i ' ■ i. This expl.'iins wli\ an issm id' p.ipti' money can drive Mo.M'.V AN!) H.\.\KIN(i ;in r(|ii;i] ;iiii(Hiiit of yold out of the couiilry s.) (|iiit'kly, fxc'ii hel'ori-' tlu' prices of coniinodilics li;i\c f'llt tlic (.•luiiii^T. Tlif iiioir highly (Kv(I(»|km1 tlif tiiiaiicial iii- stitiilioiis of tile world iln- uioi'c sciisitne will cvri'v country l)cc-onic to pricc-c iiaiiwiny inliucncfs. 1 ;>«I. Interest (tnd (iividiutl j)(iifi)U'iit'{ to fdnl^ii .stoci,' hdidirs. — Auotlur item of trade uliicli atl'ccts the balance without appi'ariii^' in tlic Custom House figures is tlie iiitei'cst and di\ ideud payments made to the holders of American securities. 'I'hese payments are madi' in foreign exchr.nj^'c and ci'cale a dtiuand I'oi- it. hence tlicv ha\e a tendenc\- to lil't the i)riee of foreii'-n exchange away from the n()j(l import point. KI7. Freight. — Most of the merchandise which is moved to or tVom the I'nited States is cai-i'ied n. foreign ships. Since !H4<> the Americans ha\e found them- sehes at a disadx anlanc compared with Hnu'land and (Germany in the cariyiny- trade of the world and the result is that wt' must i)ay freight chai-i;es to foi'ei^n companies. These paymints ai'c made in forei<;M ex- I'hann-c and lu Ip to create a demand to oU'set the exces- si\f su|)ply of hills on the mar-Uet. IC.H. Tdiiri.st.s-. 'riui'e is still another ittin which does not appear in the olllcial tiyures. .Since I'anopenn travel has heeome so popidar there has aristn a lar^e (Kmaiid for letlii's of credit on tlu' |)art of tourists. The elfeel of tjiise Irtti rs of credit is to create a de- mand for liills. 'I'hese four itrins. namely, secui'ities owned ahroad. iiitirnn^', with (liiiiaiul -trrlinj^' l-.HlHiOQi 4.H7()">, up ♦en points from Saturday 's c'lo->i'. I'liiTc «us a o()()(l iiKiuirx for riinittancc, attnliiitcd to fonioii ^1 lliiiir of stoi'ks luri'. and on account of the London sittknuiit. 'I'hc market n maiiicd ^tron^" for tlic tir>t liourV tradiu"', in uiiich demand ^tcrlin<;- went to 4.S7().")(f^ i.S'iTO. Init it hccanio ividciit tiu'M tliat till re \\a^ not ^ulficient l)uyin<.'' })()\vcr .uid the market t llefeaf ter ^okl oil'. 'I'lie openitii;' >tren;4tli was iar^'iiv iiiHuencM'd l»v the weak opening" of the >tock markit and I.on- lion's salts of »toek> here uere eNulentlv o\ere>t nnatc d. Tiierc »vas soi'ic l)inino- ot" st( i-hnt;; calik > toi" the settlemiiit. Iv the aft( rnoon liiddlnii \\as nicatlv withdrawn and the mar- ket showt'd fui'thi r ea>e, cKi^in;^' ulth demand ^terhn;^- i'H~[.')(a] IHUTA), oil fifteen points i'roni the o])eniii^ and ott" (i\i^' ])oints iiM tlie day. [May ;k 1 !)();). I The foreifrn i\ehan^i' market open* d >leadv. witli demand -ti rhn^ kS* M)((' KM !■•'). unehan^iid t'rom I'rida vV t lo>e. I'he k'ir;4e ~hoil inlcrist which !■> said lo iai^I in ( Achano^c v>.i- t'iirth«r in i \ idi nee loda\. 'I"!ie coveiin^' moveiiMiit that s| irled in on Thiir-dax \\a-^ ce^>ion that a con^ideralik part ot the pii -.i nt iiio\ i im iit is ihie '" tiio iniinipid'it inn ot one in->tilntion. "hieh i^ thoiiolit to hi' "rij^j^in;^'" the market. The maikit clo>ed stroiiL!,- with deiii.ind sti-rlili;^ 4'.87.')5(«J t S7o<'i lip iiiieeii poiiii> on iiie iia\. ^n>^l.^ and uankinc; |l iii:i|iilr() (lav- , ., ,. . ■• ..,.1 ill,. ,)i, imys,. SIcThn- o|,,.n 1 >7i„.,a hT(i,i i s;i,i,,i >,;,, , >,,; „„a n, 'i ''" '■'"^'•" I ^::o;a s:7.-i i s; ,,,,,i ^;„i, t s(i;!.i;.i sia, 170. r:.fjilninili"iiit iti foiri-n e\('li;iimr is I loo ,,1' one ccni. 'I'lic ■Loiidoii scttlciiicnf iTlcis lo tl)c iMio'lish pi-;n- lic of sdtlino' stock cxcliaii^v i raiisiiclions fort. ■\a\y. 'I'li.-it is to say. if a customer uix' s an onkr to a -aiikcr '" '"•>■ '"• "^'11 l'^' i> ii"i r.<|uiiv.l io ,kli\,,- or receive "'^' ^<'''"iii<^ unlil (lie next s.tilin- ,late. Because a L'l-cal many specnlators (iesir,- to close up their com- '"''"""•-^ '"I'-'l' 'lie s( tt|,,M,!,t ,|a!e there is like iv to l,v n.Msi.leral.le fo!vi-n I ra-hn^ jnst hefoiv set t k nien't tiiu.', 11 ' i< foreiMiKix j|,.,\t. 1,^,,.,, |„|yi||„. our seciirilies f..r tenipoiaiy sp.cn'al ion tluy ai likely to close up the track' hy sellinn. If t|„y l,;,^,, h.m "selling.' short they arc likely to pure liase stoek here were i \ id. nll_\ o\ crest iiii;i I ed."" '''"■ '^•"' ^ "I" Allien VII stocks hy L,)nd.in traders v.ould iialni.lly _\ iiiiaiis of c.ihlc | • ii> .Ki.i liu I I iiils I ( I ( iK-e ()| iifs.sa^fs. Dealiis in -sc- i)()Mi.>'ric AM) roKi.Kiv i:x( n.\\(.i: i.;: ii:iiti(s wild liiid tli.'il llicy li.i\c a lialaricc aii'aiiisl tin m lust Iid'orc scttlciuciit tiiii'' in 1 don |ia\c not sullicicnl lime to hny otlui- Torrns of stcrlin^^' c\c'liani>c and send iliiiii l)y mail. In oi'der to meet tlieir ohli-^-utions in London they arc ol)linrd to provide Imids in the market at onee. ■'A lai'oe short intei'est wliieh is said to exist In ex- ( liani^e was further in evidence to-day." I'oiciwn exehanue is hoiiL-lii and sold s])ccuhiti\el> ill much the same way as stocks. If llic dealer hclicves Miat the ;)i-ice is uoino down in the near future because of the prosjx'cts of an unusual supply of hills or because "I' ai! unusually liyht demand he mav "sell short." That is he will contract to provide exehantic at a ^'iven price at a futin-e time. A short interest cxistijiy in lerlino- ix( hanue will have the same effect u|)on pi'iecs "f cxchanyc as the same (ondiMon existing- in stocks. .\ person who has sold slioit must ultimalely Iniy the i!iin!4 li^' has aL'i'cd to delixcr and this buxirm- or "cov- ' riuii' by shorts is likeiy to sustain prices e\ en in the I ace of ad\ crse conditions. ■"'riie coMiiiiM movement that started In 'I'hursday w as continued with \ i;>()r."" I'or some reason on this particular dale the shorts I'oneluded that prices wen nolno- hiulier and made all l^istc to purchase in onk i- to make dilivcri-s bcd'oif the limitations Went hii^liei- yet. It appears that a considerable |)art of the present ■mveuient is due to t h« manipulation of one institution ^^hieh IS thounhl to be i m^in^" the jjiarket. Here a^ain w < lind anothrr similarity Ixfween the market for fort iyu exchange and tjie stock market. r,\ehanu. is manipin ited hy ai'lilicialjy interferiiiL;- with HI biddi ii!■ cahies. It is simply a iiieihnd hy which a hanker liorrows moil, y in a cheap market and Joans it in a dear one. A concrete case will make the suhjirt clear. Suppose th( actual rate of (liseoniit in London is J per cent and that tin rate in this eoiiiitry i.s fl per ecnt nker is .ihit to i»oi-row funds in Knyjand and re- I I a na loan Ihrm in this country lie will lie ah|c to ni.ake a proti DO.Mr.STK WD lOKl-.K.N i;X( HANC.l IH I per eciit |)t r aiiiiuin. K ss the expnisi' ol' ■loiiin;' hiisi- '■. ,\ iKtiik'.r (ksiriiiL;' to ciiua^f in this t raiisaelion t oljhu'cd to actually hoiTow the i'mids in lMi<.',ian(l s1p|) the Ljold to this conntry. He ean aeeoniphsh ■ ■-anu' j)ni'|)osc with less expense and loss ol' lime hy Jiawin^y- a ninity day di'at't a^^ainst a London hank and M Ihny- it in the loi-eiLiii exelianye maiket and loaning- :!i' pi'oeeitis at the jtrex ailing' rale. The pi'iee he will !i :ih/e for the ninety day draft will he the price of (le- liiand drafts less a disconnt e(|nivalent to the London ! it ■. as we ha\e explained aliove in connection with the ij.iMtations on ninety day di'afts. li is not necessary that the hanker have a deposit i!((lit ahroa(h nn///.v.— The .'uiiount of his i)i-otit • Irpeiuls entirely upon the ditrerence between the ])ro- ireds realized Iroiii the sale of tiie m'nety day dratt wWwh are near the face of the draft, as the discount rite in Knii'j.aiid is low- 1 . iilns the irit'T^s! !'.•■ Iijik (!;!!r!f'd K loaning the proeeeds. and tlii' pi ice which he must pay for the means of c(i\( linu IIk draft at maturitv. if ; i 1 J-2 Mn.\i:v AM) HA\KI\(; Ml ■CI I plus the coiiiinissiDii Tor ;icTfi)taiur payahir ro li^ Ejioiish Hank, and [\\v liritisli (iovrrniucnt lax oi. hiiK, Tlic hanker who issnes Hnancr hills is i'owvi] t(> \h- coiiie a spec ilator in sterling- fxdian^ijc hccansc his i)r(,(ii (lejKuds upon the price at which he can hiiy demand st. ; - lin^'- or cables eighty to ninety days after the date ..t issue of the finance hills. If he wishes to make sure a profit and shift the risk to others who are more N|)e latively incline( or who are hetter ahle to forecast conditions of the suj)ply and demand in the forei^-n ex change market in the future he may make a contract at the time of issuino' the finance hills for demand sterlinir ei^yhty days after at a certain fixed price. The issuing of finance hills has the same effect upon the markH value of foreign exchange as l)ills risin<«- out of commer- cial transactions. If Ihey are issued in laroe amounts at any one time they depress the market, hut when the time of maturity of these hills ai)i)roaches. the purchases of (hniand sterlino- to cover stimulate the market artifi- cially. I f the condition of the market is such that rk can never liope to iRronic the fiiiaiicia! ruihT of the world or c'oni])clc with L(;n(loii in thai rcspec-t as lon<>- as it is |)ossiI)lc Cor the rate on eall loans !n exceed 100 per cent, or so lono' ;,s it is i)ossil)lc for a 'iiidilion to arise wlicre a preininni is |)ai(l for ciu'- i Mcy. TIk profits from Hie issue of finance hills and ii'iiii otlier intirnationai financial transactions are so Mi;all when .cl oned in i)er cent that the variations of "HI Dion market destroy the delicate ad.lustmcnt hy iiKikino- such operatioris too specidative and risky. The «rrcat adxantaoe which J.ondon possesses over < \ cy other fii ancial center is stahility. Hankers can : u.-ys depend u\Hm hciiio' ahle to realize funds upon Nitisfactory collateral in London and take no risk of liavin- their transactions absolutely l^locked hy a sud- den money j)am'c. 177. Foreign dcpartmcut of a Ijanh-.~ln recent years there has been a nreat increase in the foreign business nf hanks and many foreign departments have In en cs- tahlished. This has l)een due t. tl • rajjjd extension of "iir foreign commerce and the lar;. numl)er of Amer- iiis traveling abroad, giving rise t a demand for I'anking facilities to expedite the forwarding of funds Hid the collection of drafts. C'omi)etition between the ''.inks has raised the price paid for commercial drafts 'iiawn by exporters, at the same time it has lowered the piice of drafts and banker's checks sold to importers. The advantages to a hank arising from the niainte- ince of fo! ign department arc, according to Mar- ma ff: ' 1. The foreign de|)artment affords facilities to the general clientele of the bank to trans;ict all its li.'uiklrv.r ''ii'^iness with the bank, thereby avoiding the possibility Iilloniati.m.il l',\rli;in;:r: p. It, if. MOM.^ AM) l{\Mxl\(; of liisiii;;' a prolilahk- ai'coiiiil that is djxm to siifccssl'i;! .solicitat ion Iiy a coiiipclitor. •J. S{i\(s as a vaiiial)lc aii\iliai-y tludnuh {\iv medium ol' a(l\(.rtisriiRiils and prrsoiial iii\ita(ioii to alt"ac't dt - ])()silors. .'J. C'oiiiiiiands proiniiK'Uce of llir name of the l»;'nk ainon^' .New ^'ol•k hankei-s. by whom its forrio-n ^x- chan^c is |)niThase(l. and amono- hanUiTs throtiyhoiit thu entire woi-id. with \\hom aeeonnts are kept, and hv mIiohi (h'afts a<>aiiisl its kttrrs of ereiht are nef^otiated. 1. r.'aetically eoincrts the hank into an inlei'iiational liankinii institution, thereby \astly ine!'easiii<»- its Held of o])ei'ation. by phiein-n cm- sig'uees. ]}] addition to these transactions, the possession of a foreiuii department gives the large international banker a chance to boi-row money abroad to loan at a higiier rate ol interest at iiome by means of finance bills, or to invest funds in sterling bills of exchange and thus DOMESTIC A\D l'()Ki;i(;.\ KXCilANi.i: 1 i.) realize a lii^rlur rate of interest than lie eoulil ^et l.y Inaiiinnr at lioiiic, or to en-aye in prolitable arbitra<-"e tiansaetions. 178. Ti-dvclcr's Ic tiers of credit. — So many Ameri- cans travel abroad in tlitse i.ays that there is a larye (hniand for letters of credit. It is so nineh more con- Ncnient for peoplr to obtain these letters from banks uith whom they have an aeeount that if they are eom- pelled to nrtt them from other banks they are likely to transfer their aeeonnts to those banks. Letters of credit may be issued in three ways: 1. The |)nrehaser buys the letter outright and pays cash for it at onee. The banker sells it to him at the selling'- price oC demand exchange for that day phis 1 per cent commission. Tims a letter for £l,000 with demand ster'inn- sdlino- at .$1.8.5.30, would cost $iS53 jilus $48.55 or $41»().'}.55. 2. If the ap})lieant is a depositor enjoyino- hi<,di credit, the bank is Millino- to issue to him a letter with- out payment until the customer has drawn money upon the letter and the drafts ha\e been received by the sell- h\fr bank. a. If the applicant is not a depositor or one liaving sufHcient credit, the bank will issue a letter upon the deposit of collateral security to secure the amount. lender the last two methods, the customers are not .lebited with the amounts until the drafts which they have sinrned to draw out the money abroad have been returned to the bank. These drafts are ch;iryed at the ciu-rcnt sellin. Coni/llt /-('iftl lillils (if iiidil. Thes( are usi d i>y imporlc rs to purchase ^oods ahro.id. \\\ means o! them merchandise c;m Ik purchased in any part of flu glolii' on a c;in1i hasis. although act,i;il |)ayinciil ol' tin ^\ x_Ji ^ tlu i)().Mi;sTi( AM) loiji.K.N i;\( ii.\,\(.i: rn ■ ^1 <>r llic n-,...,|s iin|)(.rtf.| uill not I,c .Icnuuided of the i'portcrs. I,y \hc hanker fi-niislnno- t|ir credit, until '.'Innly ..f rcs,Krtivc .Irafts drawn l.y the exporters. \dvanee onkrs may he -iv,,, hy iniporters with expor- t'ls lor the inanuraetiire of ooods, aeeonh'i.o- to the s[KrdieMtion.s and reciuirenients of the iinporters'u ithoi.t IMvpayinent of tlie vahie of the -oods onlered. or a eash '!' pnsit. the eo.nin.'reial letter nf ere.ht hein- snllident ■ liinty in thr hands of the exporters. I i'c (xpork !s are henelited heean.,' thev receive cash '"'• -''ll iHereh;in(hse ordered nndrr Ihe letter of creiht ' "h' date of th<' shipment : tl,al is to say. .h'afts covcr- !'-; the cost of iiierchan(hse. even if issued for a spec- '"' li'ne after siyht can he conv. rt( ! into cash hv dis- '■'-"iitiri- such (h-afts with their joc.d l,ank<>rs. " The l'My( r of the letter of cre.lit sio„s an agreement to reim- '•i>iM' the hank lor the drafts drawn under the letter at -'" '•""•'•<"t ••.■'!<• of exchan-c an si-ht. The fact "'■■' "'>■ 'I'-'fts arc drawn at sixty days ohviatev; the n'ccss!ty.,i'rhar,o,n,-intuest. fnrthe London hank does -'! I'.-iy the drafts nu'd sixty days after the -...ds have i-"' shipped and the h.ank n..ti(i,d that the draft has '", rnhnu^r f,,r invisi mnit .— ""I'l">^" til-' ral. r\- interest at hom.' is serv low at " '•'"'" '""■ '' '^ l''i^'' ahroad. 'I'he u.t. mat ,o,,al M()N!,\ AM) HANKlNCi h;iiik(.i- fiiuls that ho could make piotil by loaiiiii'^f in tlie lallrr niarktt. IK' ran do this wvy easily hy pmvhas- iii'>- ■'loll!''" hills and holdinu' tlicni hiinstlf insli/ad of Miidin^- thrni ahroad I'or discount. This he could easily do hy dctachin<4' the /irsl of exchan^i' ( I'orei^ii hills are always made out in tiii)licate ) and instead ol" indo's- in<»' it for discount, would write aci-oss the lace: "Vor acceptance only."" The correspo'.d|i(ri (lixdiint liitc in ImijiImihI .>e/;. •t(l il;i\s' iiilcrrsl lit ■»' , nil .i!l.K»=:.0(ir'. \\v\M\ Mill .SI.Miii's " — .(lO.'o (•..wmii .iuii 1-H)',f =.001.> .(MiOS Therit'oK' the priei' of niiuty-dav hills would h. Suppose the hanker piirehasid ':i(».»M)0 of iiiiietv-day hills at SI..7S; the <'ost would Ik St7,H(U». At tiie did of the nine'v d;i\s In would he ahit lo sell 'JIO.OOO ot' (1( iiiand sttrhnu. say at i^J^.S.") (if the price had not llne- 1 Miir'Tiitl. " liiltiiiMtioiuil I'.Ncliimtfc." |i. \'X\. ^A'A Do.Mr.s'ric AM) roKi'.Kix i:xriiAN(;E no til iKil'.d). or a total of ><|.^.'{.)H..3(). The net j)rofit on the exchange would tlure- Inre he S'.'Mi ..">(). ISl. (ii'nudu (uid French exchange. — The mone- tary unit of (k'rniany is the mark whieli contains one !iiMidred j)l'ennin^s. Measured in o()|d, ii is c(|ui\a- imt to s. •_':{«;{();> in Tnited States money. The (juota- liiuis f'oi- exehanuc in marks. ho\\e\ei-, aie (juoted, not :i^ till' ])ii( (, one mark, hut as the priee of four marks. l"o|- example, demand stei'liny- was recently <|uot(.'d at ~^.".>i- 7-1 •"> k'ss l-M-2. meaninii- tjiat di-afts on (iei'man lianks W( i-e sold at S.<>1. 7- it; hss 1 -.'{'J for eveiv four marks. "Le^s l-.'}-J*" nuans that ]-.'}•_' pt r e( iit of >^.'.>t 7-1*'. must he deducted from S.tt I- 7-Ki to ^et the trui' (luotation. Kxpressed decimally the (juotation would he .i»t .()()i:{ less .()()().'} or ><.•.» UO. In foi-ei^ii txelian<4es the expression "\kv mille" is iil'ten used. One-half ptr mille (written ]-•_> ()-()()) K, 1" !• thousand or !-•_'() per cent. It is a more convenient !( rm than fractional jierceiita^es. The I'rench monetary unit is the franc, divided into one hundred centimes. Mcasiued in ^^old. it is ((luiv- aliiit to S.l<• sold ,or SI. II \v;i! |„. ,,()t((| that the lan.er !'■ li^MM-'-, the lower tiie «|uotations and \ ice MTsa; >. I .) IS liiiil '■|- I Tl piotation th ui ."). h"' ^1 !<• (piotations vai'\ I -H per ceut ,,;■ in intervals of .'j-8 M()M:\ AM) H.WKINC; '•ciitiiiK' (l)ecausi' .5-S (viitiiiir is api)n)ximatcly 1-8 j^i (viit of.-,.!.-, fraiK-s. the hasis of roinijutation ) .* Tlic in tcrvals hcnin „i;|| .-,.|-, .„„| „.,, ,|,,.^^| ^^^^^^, .^. .^ 3.1(; 1-4. .).!(; 7-H, .5.17 1-2. .).!S 1-8. .1.18 ;j-t. etc.. 'I'l,,. reason for tliis is \hv fact tli;.t roriiKMlv 1-8 ikt criit ua^ dose cnouol, r,,,- tlic hrokrrs and was a coiivriiirnt fioi,n in nrhitrao-r transactions, licccntly pricrs aiv (|not((l clo^^tr and the ijnotations air rais(,| and louvivd hv dc- K-tin,<.- or addin-' l-lt; per crnt, l-.TJ per cvnt or" l-(il [)(-'!• cent. In onUr to deal witli such awkward . (notations it is iKvessary to convtrt tluni into dcrinials. lor it is iiii- possihlc to find. r(«r instaiKT. .> per cent on .-,.]<; 7-8 1. s^ I -•{•2. To (NMiNcrt .>.1(; 7-8 k'ss 1 -.•{!> into a (kvimak n wonkl first fin(i tlic decimal cinivaknt of .007-8 .0087.): then wc woidd find I -;}•_> prr cent of .l.n; 7-8 - .()Oi:,(i - .-,.!(; . .o,)H7.-, ^. .-,.1,187.-,. To tins ^^r ""'^' ■' •<'<"•'•■• •>.lT<>;n. it is a.hk'd hrcaust " ks. I-.'}-.' per cent ■• means a k.u er (piotation : smkv Ife liiu|,er tli«' fi.ymes are the iou(T the actual .inot;ition mnsrh,. Ilie reason for ad(hnn the .krima! instead of snhtraet- ili<4' it is ekar. Toconvei't a (juotation expressed declnially to the ren- idar fractional lorm is more ditlicnil. I ,. t Us take, for example. .-).l!i'J."). The ne\t ,i(arest (|nota!ion fVae'.ionalK- is .-,.1!) ;{-8 (see list al)o\t) or .5. l;»;{7-,. which is too laru,. l,y .oopj;,. .OOlL*.") is ((juixalenl approximah ly to !-;{•_> p,.,"- ,.,.,,1 ,,f .■).1!». so we would compkle !he (|notati.m hs redncm- the .-,,I() I'rirf i)f ilciil.'iiul .•\cli;illf;'i' jlT.fCil Pri.. r !li)Ml;iy .-.chaiVL'c 5-M.031 (^UotilllOIl |ll T Sl.lMI Ulirlll m' CNcilimLif ."j.-l .'{.".)!> IVaiK's are added to the pi'iee of demand hecause :•() da\' exehany'e is \v(iftli less than demand and the Idwc!' he uotatioiN Hie i^reater the numher of iVancs :i\r!i i'or SI. \>1. ArhilraiiC.^ 'V\w ai'hitra^e transaction consists ill 1mi\ iiiLi' or selling- i'\ehan<4'e on a cei'tain center indi- ixetly Ihrouyh a third eit\-. For example, a hanker wishini'' to increase his London halanet would huv Her- iiii exehaii^f and instruct his (ierman coiM-espondent to use the proceeds ot' the hill in purchasing" sterlinroeeeds and forward fm' eredil to the Paris cori'c- piMMkiit to co\ (. r tin draft sold ;d lir^t. Supjjose tli<' (juotatioiis Inr IIk' day were as follov.s: Sliiliii^: cMJiMMpr in N(\\ >'ii?k s (>| I'jirls ('\clianfrr in \>\\ ^ nrk j.l7'_. I'riincs it) I.iiiiilnii Jj..'5 per t' ' M.ir;.MMlV, " Iiiii nrili-'Tij 1-' v.. h-mL'"-.'" p. 11.'. T I"'--' .M(t^!:^ and i5.\\kin(; If Ik' sold ;i (li'al'l Cor •_'.").•_'.■)() (Vaiics. lie would rccc'i\c thn-dVotii SKH7i>.'_';} (•_'.-).•_',>() duidcd l,y .).17.-)). To cover this draff in Paris hy l-'rcm-li excliau.yv piirdmstd in London, it would he ncccssai'v for liini to hnv sterling' cxclianuv at XLHL If •_'.-,.•_>:, francs in London sold I'or f he would he i'e(|uired to huy £' I. ()()() in ordei to oet -i.-j/J.^O francs. This would cost him in New ^'ork at s;.Hk st.siO. His profit would he: Prncifils ^1,^7!) _);{ t'"-l 1,^1(1 His London hanker would ])rohahly ehar^'e him 1-40 per cent foi' doiii^ the husiness. which woidd cut down his profit hy S].-J]. lea\ in;^' it net at ahout s.'W.OO. The (|uotations in \ew VovU foi' continental cx- clian^i' arc' inlhuneed lai'^cly hy the price of sterlin«4' exchange, hotli in \ew ^'ork and iti Hi'rlin or I'aris. If from anv cause the prici' of I'onlineiital exciiaiii'e in X(\\ ^'ork should tend to fall to a point where tliei'c would he a profit in the arhit i-aye transaction, the de- inand for it on the part of the hankers who wish to "I'li^c a profit from arhit ra^in,t>' would immcdialclv force up the j)riee a^ain. Therefoi'e. there is a certain relation existing' hetween all the iiuotations of foreio'ii exe!ian<4c. When tin re is iKithei profit noi- loss from aihitrauinu-. they are said to In at |)ar. l'"or instance, if d( niaiid st'ihn^' in Xew York were at s J,.S(i!;.">. the ////// pnr. and in Hei'lin a! -JOA'A. also the ////// /nir. the comiiieicial |)ar of marks in Xew ^'ork could he found ]>y dl\ idin-.^' 4. HOC..') hy '20.V.i, c(iuals .'-'.'{iSl', the \,ilue (if (iii( maik ( xchanL;e in Xew \'oik; midtiply it h\ four ( .•_';{,S-i\ i .l).j;}2) and we hive flic commei'cial par of excliari«ie for mai-j. < \eh;uii,c which is also the iuint par. CITAT^TKK X HLMHTALLISM 1H;{. World's stock of (/ol(L—Thc total amount of ;:'(il(l estimated to have been ])ro(luce(l in the world up til the year 1911 was !f^U,()0(),()()(),()()(). The amount of ;^(i|(l ill use in 1910 tlirouohout the world as money was si;.."i()(),()()().()0(): thus leaving- over .$T,()t)(),()0(),0()() to he :i(counted for. Of this amount it is ealeulated that over three hillions have been consumed In the arts, and Jit'tv iiiilhons have been lost through the abrasion of coins; and that $2,00(M)()().()00 has been exjiorted to the Asiatic (nuntries, where it has been hoarded and j)asse(l out mI monetary use. This leaves unaccounted for over S'-'.OOO.OOO.OOO, which probably rei)resents the -old that las been Inst in transporting- it across the sea. or has ti( ( n hidden away in the earth, or is at present in hoards (if which no record is kept. IH^. Ilistor// ()*' till' pit clous mctah. — Accorditio- to t!ir fiu'ui-es of the production of sil\er throughout his- ! ric times it is estimated that up to li)l() there had been liroduced $1.*{.77."),<)r( at lioanls wliicli strxcd no xalualilc piii'jxisc' otln than to |)i'o\ i(K' a \ isihlc (,'\ idincf of tlic wtaltli and powci- oi' till i)\\ iit'i". ( )nly a small |)aii of tlir cxistini; stock (d' precious uk tals \\ as used as a circulating' iiu- (liuiii. and of course at that time its use as a liasis dt ci'cdit was entirely unknown. (iolil and ^lUir wtvv rrti'iirdtd a-^ an cud. not a- a means; a^ t I'ca^n ic, not iiinm \. 'rii('\- wri'c di^t rilait id, not l(\ Iradc, l)ul l)\ war. It wa.s tlK hand nC the (■(iiuiuiini' tliat stri|)i)cd tin' iVoni [lalaecs and tiiii|ilr>. If \\v\ \Mif takni t'l'cnn tlu -.toi'c dt' nHinarclis, il wa> imt to tVrip^lit tlir ca a\an> nt' ronnnirci. Ijiit ti) till the cliarii't- and nnilr earl--, t(i load tlir sinn})tt r lior-r- ()i- the cainfl trains of a \irt(iri(iu- army.' At'ti'i- thi' fall (d' the Honian l\mpiic the mines fell into the hands of the harharians in their southern mid' products, ami most id' such (.'xchan^i as ixisttd was doni' on a li.irtc r hasis. Taxes and i)ay- ments to the lord ol' the manoi- wx'rc madi' in ])ro(lucc. The i'o\al eourl was niaudain(d rmt I'rom monev taxes collected, hut from tlu pi-oduce of th( ci'ow n huKK wliicli the kini;' rec-ei\cd as the- lord of the manor. W'ai's were condu(dcd withmd the use of mout _\ ; the sol- di* were e(|uipp((l from iheir own resources antl svcrc ' y A. W'.lki r, •• M(.ii.\," p. las. HiMr;i".\i.!.is.M ■)i> ii^t;iiiK(l Ciom tli( I'oraoL' ol' the counli'x- ti';i\ crsrd in ( ailll);lli•ll^. IH(). Discover! I of A iturica. One ol' liic most iiiipoi'- ! iit flfects 'if liic (lisco\ri'y of Aiiirrica on I^'iii-opcaii idiioinic coiuJitions aro.st- IVoiii tin- (juantitiis ol' .sihir which hrniui to Mow in an incrt'asino- stirain IVoni the Spanish colonics to S|)ain and (Voni Ihcncc to he dis- liiiiscd throuii'hont Kni'()])c. TIic ca^cr (picst of tlic lai'ly explorers for the precious metals can he hettei- understood when we know that the value of silver was Many tinu's its value to-day. and that the precious metals \u re al)out the only pi-opeity which could he jjrofitahly transported dui-inii' these limes when transportation ".as so dillicnlt and e\])ensi\e. I. ST. ElJ'irl of silver from A in cried.- The effect of 'lie .\mei-ican siher upon the economic conditions of l'",uro])e was revolutionai'y. Payments fi-om the tenants I" the landlords for the use of the soil had heen made I ither in |)roduce oi- in lahoi-. a sxstem which I'educed llie tenant to a condition not far remo\ cd fi'om that of the slaxf. (Ommerce was so limited that eveiv com- ''I'liiily had to he practically sell'-suppoi'tin<^\ and its rnnsumj)tion wa.s limited lo t!ie articles which could he produced in tiie immediate vicinity. The lack of com- nicrct' made it |)ossil)le for famine to exist in one county AJiile wrcat plenty existed in the iieiu-hhorinL)- eountv. The transmission from payment in kind to money pavinent. which soon |)i'ofoundly altered the relatiotrs "(iwfcn the loi'ds and tenants, makinti' the latter much "lore indep( iid( 111. was not so much due to the greater 'Mindanceof money as it was to the effect produced l)y 'h new silver on prices of ail C!»mmodit ies. The Span- nils to whom this new siher tirst came, appeared in ihe mai-kets of Kuropr . ^ jMirchasers of -ouds, thus 1 ■ : ■ }r,c, ^I()^■!:^• and h.\\ki\(; \l »'i(;ilitin- a steady (Iciiiand lor export. TIic rise of prices and tlic skady market uavc a stinmliis to indus- try. Orinii.ally money had I.een nserm- uoh! or silver to the mints and have it eoined into money winch shall he le-al tender for all purposes. Hy thus perniittino- the eoirta-e „f m.-tals without restrie- tion, the relation hetween the values of , oins an.I hnllion IS automatieally re-ulat..,!. A demand for monev will tdi.I to M.erease its value eonipand to h.dlion; ov, as it Jil'Pi!i|)n:-,cil of either JJTl.-.J ^vain.s ol' s;l\cr Ol' "J l-.7'> ^^fair.s of pure n'old. the I'alio as to weight li( iiiL^' lirtc'fii to oil''. Ill l!s;U llic ratio was made six- tr( II to oiR', tin- aiijuiint ol' pure "^old in the eagle Ijeiiig !V(hieed to '2''i.'2 grains. 1S'.>, l)i/fiinliii.s ,'//' hiincldlii.sm. — In tlie study ol' the standards in a pre\ ions eha])tci' it has been seen how llic (htVereiK'e in mint ratios between the diU'erent 'i'o\ - (inments created a (■on(htion which mack' it ini))ossible to keep gold and .siher coins in cii'cnlalion eoiu'urrenlly. Ill I'act there has been no lime since :lie founding of the ;:o\trnmenl ol" the I'nited Stales that il could ha\c been said that the counti'v \\as actually u|)on a double stand- ard. The ti'uth is tjiat the I'nited States was lirst upon a siher standard; then from IS.'U to 1H(>'.? it was upon a gold standard: then from ISd'J to the ixsumplion of specie payments in 1S7'.> it was u])()n a |)aper money standard; from 1H73 to 1S7'.» it \\as nominally upon a single gold standard, and after the latter date actiially upon a gold standaivl. In ISK) the I'liitid Kinmlom a(loi)ted a siuii'le <>(>ld standard. It was the fii'st country to do so. The other countries of Kui'o])e and the ( 'nitt;! .Statt's continued nominally upon a gold standard until the seventies. Hefore the beginning of the nineteenth century bimet- allism in lMir()])e was practieal)le because trade at that time had not been dexclopcd to a jx^int where the dif- I'l I'ent ratios in the diffd'cnt connti'ies produced any a.jipreciable llow of metals. 1 1 is not initil \alnes and prices i'esi)ond r(adil\ to conditions of supply and i\v- maiid and until Ibci'c is sullicicnt commercial intcrcojirse I'( twceii h)calities to c(|uali/.c \alues that dilliculties con- icrning tbe standard arise. Prior to the ninctt'cntb (■( ntiu'v there \Mre so man\- intei'ferenct's with tjie i.at- V I; 1: 1!fff I i il W II 7/i MICROCOPY RESOLUTION TEST CHART ,ANSI end ISO TEST CHART No 2 1.0 lii 128 II 2.5 j^ ■» 11 = t^ lail 2.2 ::i^ - I: . 2.0 li k. ^ nil 1.8 I.I 1.25 1.4 ; llll 1.6 ^ /APPLIED IIVMGE Inc K 1 4609 Phon» IjS -M('M;V .\\I) H.WKINf; iiral play of supply and (lo.md llial the values were mostly c'()ii\(.iiti()iial lather tiiau coiiipft:; : ;e. I!>0. Advuutn^^i.s of hinula.'li.sm. Xotwithstaiulin-- the fact that practically all nations except the I'nitcd Kino(l,,„, were on a hinictallic basis hcl'oix.- 1870, the system could not he called international hinietallisn'i he- cause of the different ratios of the various countries. Those authorities who adv.K'ate hiuietallisin do so on the ^n-ound that ii assures a more stahle standard than either metal il used eNelusi\ily. It is ar-ued that if the pro- ductI(Mi of eidier nietal should diminish co.npare.l with the other, its iK.tural rise of value wo.dd prevent its bemn- taken lo the mint for coinaoe: the monetary dc/nand of the country would therefore fall upon the other iuetal accordin- i,, Cvshanrs law (which states that cheaper money tends to drive. .nt the dearer). The mcreased .lemand for the more abundant metal, trans- '*■'■'■'■'' '" it '■'■'>m the scarcer nu tab would tend to restore tiu' e(|uilibrium be tween tlu- two. I-'m- in^iance. if under the conditions just mentioned It had b.vn o,,|,| i!,;,t |,.„| ^.,,,,,,„ scarcr and more valu- '•'''*■• ""'• * n iiu jiiorie IS BI.MKI'ALl.lS.M 1.5') Silver is coined in limited anionnts only, and used solely \'nr the minor coins. This was tirst systematically put III practice hy the I'nited Kingdom which, as has heen said, adopted the single yold standai'd in ISKl. All the (isili/.ed nations have since adopted this mode ol' usin^ the two metals together, to the accompaniment of a sinyle ^'('Id standard. in the Tnitcd States the smallest u'old coin that can lir com eniiiitly used is the (inai'ter ea<^!e ( •'^•_'. .")()) . which (■(irres])oniis with the British half soxerei^n. the (xer- man ten-mai'k piece and the French ti\e-rranc piece. Sihei" is therel'orr used for the smaller transactions, and i;Mi in (alifoi'nia. the yellow mrtal was poured upon the mar- ket in lai^e amounts: unld eoinat^c increast'd while the \ahie of the metal fell, and siher disajipeared from cii'- eu!ati(in. 'I'his led to the act of 1 S.").'{ whii'h created the suhsidiary system in the I'nited State.. Half dollars, i|uarters arid dimes were coined of such short weio-jit in lint' sil\( r that no one \v;is lemptid to ( \port them or to nielt them for commercial pufposes. The half dollar was made to conl'iin 17-. H trains of line sihei'. The -■il\cr dollar, tin iVee eoiuiiiic of w hieli ;it tli;it lime was authorized, contained, as it doi's to-day. '{71.-"> urains of pure siher. The suhsidiarv silvei* was not, of eonrse, !i"eci\ eoini(i; ;in(i iiieicjore i^ojtj coiuii iioi in- liioiii out of I'irculat ion. The yi)\ermnent alone hou^ht the !iil lli Ml Kit) -MOM'.V AM) nA\KI\(; Sliver bullion in the market, and arrannrcd for its coin- an-f. To uuard against possible abuse, the sul)sidiarv silver eoin has been made a lr2. Earhi attempts at /////^///o//.-^After 1870 the annual world output of ..•old fell ofl': and as a result ^•old tended to appreciate in value and j)riees I'eil. This process was hastened in the Tnited States by the con- traction of the pai)er money issu j during- the Civil War. HuMiKss biM.an to suH'er as prices continued to fall. It Avas thouoht to improve business conditions and to put an end to i'allino- prices by issuing- an additional amount of pajur money. This led to the formation of the ^rrcen- l>ack party in the TOs. It was stron^- enouasis of the monetary systt'in. The existence of ;i nom- inal douhle standard was forgotten. In 187,'} it wis expected 'li.il ilie p.ipt r money would he soon gi\en up ■111(1 a specii- systdn re-estai)Iishe(l. Sp< cie pavnieiits were, in fad. n'suincd in IK7!>. Hut when the silx* r 'loilar was dropped in 1H7.'J from the list of coins that could l)e struck. hi?uel;dlisn). |onn- olvsojcte in nraetice ^ vii-n I , j»| i I 'I I ' It IG^^ MONHY AM) nANKIXc; was finally ended by law. This lias been often called "the crime ol' 1873." The dollar was supposed to have been (ir()pi)e(l from the list by stealth, by persons inter- ested in the gold standard. It was done (juietly, to be sure, probably because no one at the time thought it of any moment. 10.). Act.s (jf 1.S7S and /s.'id,— The greenback ])arty, having failed in its attempts to issue more pa{)er cur- rency, sought to secure the free coinage of silver. This it could not effect; but by way of comj)romise the acts of 187H and 1890. already referred to in a previous clia|)ter. were passed. These measures provided I'or the purchase of silver bullion by an issue of new Treasury notes, the total issue amounting to $1. '5.), ()()().()()(). In 1878 the HIand-Allison Act i)rovided that th- gov- ernment should purchase not less than -S'i.OOO.OOO worth of sihcr bullion nor more than $4.0()().()()() worth each month, the bullion to be coined into dollars of the old .standard of iineness. namely .*J71.'-'.5 grains of j)ure sil- ver. Oidy the minimum amount was purchased each month. During the ])eriod 1878-181)0 about 2..)00.00() silver dollars were coined each month. 80,000.000 a year. These dollars were overvalued, limited in (|uantity. of full legal tinder, and in every respect a,s valid for |)ay- ment as gold. In 18'.»0 the .Sherman Act was |)assed. oidy to be repealed three years later. It marked another comi)ro- mise between tin friends of free silver and its opponents. During the threi' years of the life of this act. silver was ])urchase(l jjy the government to the e\!eiil of adding •21 8.000,000 dollars to the country's monev supply. Tnder the act of 1878. a.')'_>.000.000 dollars had been coined: so that when these operations came to an end 570.000.000 dollars of overvalued silver had been coined lU.MF/IAM.ISM 163 ;m(l put in cirrulation. At one time hctwccii 1890 and IS'.t.'J Ihc silver dollars were coined to sneh an extent that they seemed a!)ont to drive ^old ont of eireidation. This was the eliief cause of the panic of 18!>;i, whicii led to the repeal of tlie act. Ouinu- to the increase in tlie (•oinitry"s ])opulati()n and c<»ininerce since IH'J.'J tlie de- iiiaiid for money has enormously increased; hetice, .'}. although Quehec capitulated in 1T.")!>. Voi- some time ])recedin^' the capitulation of (-^uehec. the ti'ade of Canada had heen almost alto^ethei- in the hands of ^oxernment oilieials, who manipulated it for their own henetit. As a result there were no open markets I'or the produce of the couTitiy. The rapacious agents of the <.foveriiment de- manded it all. They paid for the ])roduee in which they dealt with depreciated and ultimately, ahnost worth- less — pa|)er money issued hy the colonial <4()vernment. After the fall of (^neluc these ollicials returned to France, leaving- Canada practically destitute of a mer- cantile class. 10!). .V( r.' Kiii^]tiii(J fniiJcrs.- The victorious l^ritish ai'iiiy was followed hy a force of shnwd traders from New ^'ork and Massachusetts. Tluy came to C anada to seeui'e a share of the eontrai'ls for furnishing- the troops with supplies, and also io particiijate in the fur trade which had reached enormous ])ropoi-tions. They dealt e\tensi\ely in u'oods of l-'n^lish manufa<'tui'e. and liifi .■'^■■: HISTORY OF CANADIAN MONETARY SVSTKM l(i7 l)()iinlit from the colonists their farm produce which tliey exported to (ireat Britain and the West Indies. Thus the wholesale trade of Canada fell into the hands of Xew iMi^laiid traders, under whose control it remained during- succeeding- years. ( )nly the retail and the domestic trade continued in the hands of tlie French, The racial differences and ])rejudices, together with these facts, explain in larfjfc measure the discord which subsecjuently arose between the two races in Canada. The New England traders distanced with ease their French competitors. The vi^or and enterprise of these dealers almost at once ^ave them a commanding- posi- tion in Canada. To them, more than to any other cause, was due the recovery of the colony from economic paral- ysis. It is true they received very little support from the p^ii^lish military administration. The army officers who held the country and administered it under military law affected to despise these merchants. They looked with more favor n[)on the Canadian noblesse who had remained in the colony, and preferred their aristocratic society to that of the democratic and resourceful trades- men of their own nationality. 200. Financial situation after the Conquest. — The military occupation of Canada lasted, strictly speaking-, from 17.39 to 17().'}. During- that time trade i)y the com- missariat dei)artment, the IJritish troo])s ancl the Xew Fin<>'land traders, was carried on in British currency. 'I'he paper money issued during the French regime fluctuated in value with every rumor of its |)ossible re- demption. It had become, in fact, an article of wildcat speculation. A larye (juajitity of French coina^re had disai)])eared from circulation durin<2- the naner delntre of the French ascendai lev It a})peared very s lowlv iii I- ui)on the establishment of Hritish rule. Such French ■.\ t\ IGS M()M;V AM) HANKI,\(i ill ifi. ■ (•(•ins as found tlRir way into circiilatioti did y.o inostlv tlh'oiioli ictiiil tradr. and wcix' accepted on a .slii-litly o\crratcd hnllion hasis. When the trade of (Quebec and Montreal be^*'an to re- vive tliron.irh the activities of British merchants from the New Knuland colonies, the currency standards of these colonies l)e<,mn to prevail in commercial transactions. 'I'he merchants of Quebec we.e most closely associated in their transactions with \ova Scotia and especially with Massachusetts, while the Montreal traders and tli<' inr dealers were most intimately connected with the colony of \ew York, by the Lake Champlaiii route. Now, the Xew lMi,nlan(l colonies were closely asso- ciated with tile West Indian trade; and so the Spanish dollar, or piece of eiyht (S reals), had come to be the prevailing- coinage in circulation. Through it exchan<«es were made with (n-eat Britain. Nevertheless, the nom- inal standard was the Eritisli shillino-. TJie Spanish dollar was eiiuivalcnt to 4s. Od. sterlinir; but owiii"- to tlie scarcity ot money in these new colonics, there was a constant tendency to overvalue it. In Massachusetts and Nova Scotia the customary ratinn- was .5s., while in Xew York colony it was 7s. (id., and at times 8s. IJoth of these ratin^-s were introduced by the merchants com- ing- to Canada. The former was })reval(.nt at (Quebec, where it was known as Halifax currency, and the latter at .^^ontreal, where it was known as \'ork currency. It was not. however, untd some time later that the Halifax currency standard was aiioj)te(l for o-overnment purpo„es. I'Ol. Kar!// i\v peri in tills in media of e.vchaiiffc.^ln 18(M. the year after the establishment of civil mnern- ment in Canada. (Governor Murray passc(1 an ordinance '■for re^ndatinn- and establishing- tJie currency of the provhice." By this ordinance the chief gold and silver IllS'l'OliV UF CANADIAN .MONi/IAin' ^VS'ri.M |(!> I ciiiiis fjunlliiir to Aiiu'ricaii coloni;!! iradi' wvw .st'j);i- ratcly i-altd. Of tlic sihcr coins, the S[)aiii.sli dollar was rated at (is., tlic l-'rciifii crow ii at ()S. Sd., and tlit Hriti^h sliillino- at Is. U\., the Spnnish pislarccn at Is. "Jd., and the French iiinepeiiiiy piece at Is. currency. To meet the need of IVactional currency it had heen custoniai-y to cut ui) small coins into hahes and (juar- ters, and to pass tlie sections as change. 'I'his facilitated fraud, so the ordinance of ITCt ijroliihited the circula- tion of cut money. A more successful device to meet the scarcity of fracti(-nal currency was the issue l)y the merchants of small due hills, which were good at their face value for merchandise of an e(iuivalent amount. In cases wliere the merchanls who issued tJiese l)ills were well known, and where die paper was honored at once on demand, these notes gained a more or less general cii'culation, and in this way met a very real need of the colony. This ])aper currency originated in French Canada, and the notes were generally introduced with the words Hon pour. Tn this way, this paper came to he nni- versally designated as lions, and the name followed their introduction into Tpper Canada at a later date. Without a douht these lions ])repared the way for the suhseciuent issue of hank notes. An enterprising auc- tioneer of Quehec. with no small degree of self-assur- ance, petitioned the Council of Quehec in 17(>7 for a monopoly of the privilege of issuing j)romIssory notes for small sums as a suhstitute for fi actional currency. Thi.^ ap])ears to he the first aj)plicatioti for hanking privileges in Canada. 202. Shnuhinl o/rnin'ii of fjir cnjrtfiii — 'I''hf^ vatijifTo given hy Ckneral Murray to a numher of the coins listed were not consistent with each other. He purposely over- i i u ! lii ■ t t ; • .£iil iiil 170 .AIONKV AM) HANKINT; rated tlie French coins in order to draw tlieni once again into circulation, and retain tlieni in the country. Some effort was made to secure unirormity thi-ou^hout the colony: hut tliis was not ett'ected luitil after the out- break of the American rexoiution. In 1777 an ordi- nance was passed makin-^' the Halifax currency the standard money for the coimtry. 'Die merchants of Quehcc a?id Montreal had not l)een ahle to come to an agreement on this rnatter: hut, a* the outbreak of the American war. the (luestion had been decided in favor ol" the merchants of (Quebec, the Montreal traders bein (>d. each, tlic British shilling at Is. Id., and tlie Spanish ])istareen at Is. It is intertsting to oi.Mi in this connection, that as compared witii tlii' standard dollar the Hrilisli crown was underrated to the extent of td.. with the rc- .sult that it disap|)cared from eiiculation. On the other hand, tlic I-'rench eiown was made by law to cii-culate at more than if was worth, and hence was in ukh-c ••en- eral u^(• than even the S|)anish dollar. Th'- pistareen. too, was by this ordinance gi\en a \alue far more than it wns worth, and as a result was attracted in large sums to the colonw I'"oi- a time it was irseful in increasin<>' the suppl\- of fractional currency: but lat( r it. with, the French crown, became a source of much trouble and ex- y)ense to the whohs.-.Ie merchants and tlie b.anks. The ^old coins, too. had been ni\,.n ;i |,.n;i| value: but from them no h'oulilc was (■\peiiI•k. New .lersey and the adjoinin.u' districts (if IViinsyh ania. So d( < py roote' the new notes into specie whenever they fell into their hands. l?ut .soon they gained confidence in the new i)aper money, which ])erformed its functions with the greatest elhciency. These notes hore interest and those of the larger denominations were convertihle into liills of exchange drawn on the IJritish Treasury. Cer- tain small denominations hore no interest and were jiayahle on demand at the army hills otHce. Soon nionev became plentiful throuj'hout the colony. The war, as far as Canada and the i'e])ul)lic were concerned, was really a tame affair. There were a few skirmishes wiiicli Canadian and iVnicrican historians have glorified until they have hccome great battles. It has often been noted that, generally speaking. Ciirat Hritains wars have always meant high prices and prosj)ei-ity for Can- ada. It was ji'stingly said that the litiugy of Canada contained a fei'vent |)rayei- "for a bountiful harvest and a bloody war."' The ariny bills. ]u)wcver, althongli tlicy did serve as a medium of exchange, were not designed as such. In i( ality. they were simj)ly bills of e\c-hange used to pay Canadian merchants for sup|)lies furnished the military administration. These bills w* -e sold throughout the wai' in Xew l''nghmd cities, where tiny found ready biiyei's; for. as is will known. New Kngiand was abso- lutely oj)posed to this useless war. 'I'hese notes fatnil- iari/ed the Canadians \\ith papei- currencv. and i)avc(l the way for the successful launching of se\cral banks in the tiear futmx'. '^x 17G MC)M:Y AM) BANKING III 210. Origin of the ^rcat chartered hanks. — In 1815 and the following year an attempt was made to secure a charter for a CanacHan bank. It was tlie general opinion that a provincial bank whicli had the power to issue paper money would greatly aid the trade and commerce of the country. Its notes would take the place of the retired army bills. In 181<> and again in 1817 attempts were made to secure })ank charters; but in both tiiese years constitutional difliculties led to the pro- rogation of the legislature before the bank bills were reported. All efforts to secure a charter from the legislature having failed, several Montreal merchants and others who were interested decided to estal)lish the bank as a private corporation. On May 17, 1H17, the Articles of Association of tlie Bank of Mor.treal were ado])ted; and ten days later they were published in the Montreal Herald in separate form. It is interesting to observe that Americans subscribed a large portion of its early caj)itnl. and several of its chief oflicers came from the Cnited States. 211. Alexander II(imUt(fn's principles adopted.— In its essential and most characterislic features the Bank of Montreal paved the way for subse Treasury. In I hi' following year t]n'e(> other ])rivate banks were cstablislud in Canada. These were the (Quebec Bank HISTORY OF CANADIAN- MONETARY SYSTK.M 177 at Qucl.cc; tiic Bank of Canada at Montreal, and the Hank dC Upper Canada at Kiii'^rston. All of these fol- lowed, with slioht nioditications, the articles of associa- tion of the Bank of Montreal. 212. Articles of association.— The Icadinf? featnrcs of these articles were as follows: The authorized capital nf the hank was £;2.5(),()0() cin-rency, or -"i^l/JoO.OOO. TJie shareholders were liahle only to the amount of their suhscrihed shares, the douhle lial)ility clause l)ein^- intro- duced much later. The bank was 'forl)i(lden to deal in real estate or to lend money on mort,!jfaoes, althou^i^di niortgai elrcii- lation were ])resented for payment. It was not until' 1822 that the three Lower Canadian banks— the Bank C— VII— 12 liitf .'«a'-j.t^, to i)laee its curiency on a gold ijasis. HISTORY OF t'ANADLvX .\I(>M;J.\UY SVSTll.M 179 Silver coinage was made a token currency by raising* its face value soniewliat aho.e its bullion value and limiting- its legal-tender properties to iOs. Tlius, silver was main- tained as a simple t'raetionad currcnc}'. Tbe new regu- lations operated so successfully that the Bank of Kng- land resumed specie payments in 1821. The IJritish government resolved to introduce the gold standard into all parts of the emj)ire, beginning u ith tile more important colonies. It was proposed, in 18*J.5, that for Canada the sterling standard should be- eome universal; and, fui'tlier, that the British siher and copper coinage should l)e employed I'or all moderate payments; while larger payments should be made by ineans of bills of exchange issued at the fixed rate of .'J per cent per annum. In other words, £100 sterling payaljle in Britain would be exchanged for £10.'J ster- hiig payable in the colony. It was exi)ected tliat British silver and co])])cr c(Mns would remain in the colony and furnish a permanent medium of exchange. It was not thoughi, ho^ ver, that the Spanish silver dollar could be dispensed with at once; so it was provided that for the future, it should be rated at 4s. 4(1., with other silver corns in like projiortion. •J1.5. Iicsiilt (if ciirroici/ reform. — As a result of all this, an order-in-council was sent to the British Xorth American colonies, among other;, virtually making Hiitisli silver an unlimited legal tender and liritish copjier coins legal tender to lOd. James Stephen (after- ^\ards Sir James), legal adviser to the colonial otlice. gave it as his o])in!on that ITi*; Ma_)esty had no |)owfr bv order-in-council to change the ratinjp of coins fixed \)v the Iro'isilaturo of the colon.ies. TTis oninion. b.owever. was overnded by the attorney-genend and solicitor- general. ^Vhen Lord Dalhousie attemj)te(l to carry out ISO M()M:V AM) HANKIXG liis instructions lie I'ound the lc<4islaturc of Lower Can- ada unalterably oj)j)()se(l to it. They simply shelved the whole matter \\ hen it was referred to them. In Uj)j)er Canada, the people and the legislature de- clined to ado])t the Hritisli monetary standard. Al- though the otHcial standard was the pound currency, the people had become accustomed to doing business in dollars and cents. The bank notes in both provinces were, as a matter of fact, printed in the American standard. The F|)j)er Cana.dian legislature, in response to the message of the lieutenant-governor with the ac- com[)anying documents of the Treasury, simply raised the rating of the British silver and copper coins. The crown was rated at os. Dd. instead of .5s. 6d. ; the shilling at Is. 2(1., instead of Is. id., and lOd. in British copper was made the e(|uivalent of Is. currency. •JK). Kxchdh^c i\:iih the United Kingdom. — The British government was thus frustrated in its attempt to alter the legal basis of the Canadian currency. In an- other way, however, it had conunand of the situation through the exchanges. The Treasury now sent out t3(), ()()() sterling, in silver, and a consi(lcra})le sum in copi)er coin. Instructions were sent to Canada that henceforth supplies for the imperial officers were to be stated in terms of sterling money. Payments for these suj)plies and also ])ayments to the troops were to be made on the same l)asis. Whenever the Spanisb dollar was enjployed it was to be thereafter rated at only 4s. 4(1. Payment for large sums might be made in specie on this basis, or in bills of exchange drawn on the Treasury in London at the rate of €100 sterling for £I03 of the eniitract. l^it owing to the constant demand for l)il!s of exchange l)y the Canadian meivhants, and be- cause of the tleclaration of the government that these HISTORY OF CANADIAN M0N1:TAHV SYSTEM ISl •^^1 liills would he issiud tni' Hrilish sihcr ;il li per cent |i!vmiuin, the IJritisli eoius were eonstiUitly witlulrawn t'lODi circulation to purchase bills of exchange. As a ic suit, the very machinery which was to ensiu'e the cir- culation in Canada of liritish coina<;e resulted in vir- liially dri\ing- it out of use; and the iield was left to the i)aper issues of the- Canadian and American banks, supplemented by French silvci* in Lower Canada and American and Si)anish siher in Upper Canada. It was sof)n discovered, too, that the premium of 3 per (■(lit on IJi'itish bills was too high. It was cheaper to ( xport the IJi'itish silver directly, which was done. As a result, the military authorities were forced to receive ,ind pay out little else than Spanish and ^Vmerican dollars, and fractions thereof. In conse([uence, the Treas- ury reduced the ])remium on excha.nge from 3 to ll o ])er cent, and bills of exchang( c'e more resumed their place as the standard means ot laking payments in Hritain. -17. Canadian currnici/ in tJic second quarter of the iiinefeenlJt ceuturi/. — The failure of the attem])t .f the Hritish o()vermnent to establish the sterling standard in Canada revealed ceitain peculiarities and anomalies of the Canadian monetary situation. The Canadians had adopted a ])urely tv.inentional standard, the Halifax pound. There was no coinage corresponding to it; and, therefore, it was necessary to utilize as a medium of ex- change such foreign coins as were available in the course 'if trade. Thus, it was found necessary to admit to un- iimited legal tender a variety of coins over the issue of \\hich the Canadian Icgislatiuv had no control. It was Mot iiossiblc to nlace all th.ese coins on ti uar ^^■!tll each, other according to their real value: for that would have involved various awkward fractions most inconvenient i i ' J '!'{• 183 M()\EV AND BAXKIXG IH m i'or tiRir rapid circulation. M()rc()\cr, exact ratinfj^s could lia\e a|)|)li(.(l only to coins of lull weight, and unaliVctcd I y I'atcs of cxclian^'c. .\s a matter of fact, British and Anicrican coins in ])articular (luctuatcd in value with the I'ate of exclian^'e on their respective coun- tries. And, moreover, except for the <4dld coins, the ofl'icial I'atin^' applied to them was hy tale, not hy wei<4"ht. As a result, it was made prolitaMe to import and retain in circulation all manner of worn ;nul defaced coinaj^e from every country with which Canada had coniniercial dealings, •Ji8. Varichi of coins '■ircnJ(iit(L--The most common of the smaller coins in circulation was the Spanish ])istareen. the most worn and defaced, too, of all. It had been discarded hy the Americans when they ado])ted their national cui'reney. It ])assed current in Canada for Is. or 20 cents, whereas in the adjoinin?! 1st MONEY AND RANKING ])Iy of silver coin upon the Pliihuleli)liia Mint, and upon iniijortations Ironi the I'nited Kingdom. Tlie pound sterhny' was onhnarily rated at il 4s. 4.d. currency. In Ipper C'aiuuhi the IJritisli shilhng had long passed lor Is. ;>(]. currency, while in the lower province it was rated at hut Is. Id. The very close trade relations be- tween Canada and the United States, and the consider- al)le note circulation the Canadian banks enjoyed along the border, made it essential that the monetary media of the two countries should be as much alike as posoible. The familiarity of the jjcople with the decimal system, and the rei)lenishing of their stores of specie with Ameri- can coin, pointed to tlie eventual assimilation of the Canadian currency system to that of the rnited States. 'J-JO. Ls.stic of .short lime fi-ovcriDniuf (Ichcnturcs in 7,9;,9.— The revival of trade alter the crisis o. 18^7 had bc( n s' Av in bcoiunino-, hut by ISU there was a very .«.;•( IK ral inipi'o\ mu iit. and a decided demand for new capital. The movement t.)ok the usual form of economic expansion, although in Canada the develoi)ment i\\ou-. There were a great number of commercial failures; a great r-Uing off in the export trade, csp^ -nilly ii: ^hipmcnt^ of timber, wheat and produce; a heavy reduction of dis- HISTOKV OF CAXADIAX M()M:TA}{V SVRTF.M 1S5 nil lilts made by the banks, and a sharp contraction in tlitir circnhition. So <4reat was the f^overnnient's need in 181.8, and so hopeless the prospect of borrowino- money in Kn<4land, tliat resort was made to an issne of debentures. l)earinir interest at ('» per cent. Tliey were of the form and ap- |)(aranee of bank notes and were issued for sums as low .IS $10, were payable in one year with interest, and made leeeivable for jjublic dues. A ste}) not contemplated hy the act was the re-issue of the j)ai)er after it had \kv\] paid into the i)ublic eliest. A total issue of £12.).- {100 was authorized. In the foilowinn- year the re. .'is a measure ol' safety .'ind nr<(>auti(in curtMiled their discounts. Within the veur their circulation had fallen to two-thirds its volume in 18.")r); juid discounts nere cut down in corrcspondiiiM' decree. ,\l once there .ircKse u demand from both the tradinj'- and the a^n>,- 0(M),()0(». ;ind ha\e the notes jint into eirenlat ion by the banks; the notes could be obtained bv lb< ni from llu HISTORY OF fAXADIAX MONETARY SYSTEM 1«7 Treasury on deli very of one-fifth the amount of the notes in speeie, one-tiftii in o()\;ernment securities, and i)y ^ivin>•_».•_'.")().()()() was owing to one bank, and that bauk was pressing for payment. The legislature, in an altemi)t to secure funds, finally pa^sed an act in this vear. which authori/ed the issue of not more than .^H.(M)().()(M) in ;'rovincial notes: tluy were made ])ayable on demand in specie, cither at Toronto or Monti-e;d. as the notes mitiht be dated. Tbev w.vc a fiill leg.il tender except ;il tliese Iwoolliees. Tlie go\(rno|--in-couneil was authorized to ni;ik( ari'angements with an\ ban!^. tliat so wished, to surrendt r its right of noti' issue; such hank, however, retaining the right to icsume its issue privi- leg-es upon gi\ ing three months' notice. N'arious inducements were oll'ered the l)anks to g( t IIkui to vacate the lield, in tills particular, in favor of fi w 1 » I .,,_4- 188 MONEY AM) BANKIXG li- the governnifiit. Ilowtvtr. only one institution— the IJank of Montreal -pro\e(l willin--' evtn temporarily to surreFider the rioht ol' note issue, and to undertake the eirculation of piovincial notes. The provineial note issue was. foi- the time bein^y". the liank of Montreal's favorite seheme: for. so far as this particular bank was eoneerned. the first ed'eet of the measure was to li(iuidate Mliat had bcni a distinetly inactive asset. This was done by convert in«r tlie loans which the bank had made to the i)r()\ ince, and its investments in ^•overnment de- bentures, into |)rovincial notes a\ailablc for use in any kind of excliannc. It was provided in the act that to such banks as suri'endcred tiieir riyht to issue notes, and w ho withdrew their notes from circulate-' with.in a year, compensation would be i)ai(h until tlu );ry of their charters, at a rate not to exceed .■> ]ht cent per amuim upon (lie nmoiint of tiieir eirculation on A])ril ;J0, 18GG. A commission of one-(|nai-ter of 1 per cent was to be paid every three months to each bank circulatinir provhicial paper instead of its own. Hanks relincjuisli^ inu- issue ))ri\ iien-ts wxw fui'lher exempted from the obliu-ation to hold one-tenth of their paid-up capital in l)rovincial (h 1 . ntures. and were permitted to exchanu-e such (hbeiiiuics at |)ar for pro\ incial notes. Tile LfoNciiiment. on the other hand, was to hold a reserve of -JO per emt in specie, against its leoal tenders, for the aiiioiinl in circulation up to s.""».(M)().()()(); and aoainsl amounts in excess of tiiat sum •_•.-> per ecnl in specie until the whole ;!uthori/((l issue of SH.OOO.OOO was i-cachtd. Co\er of piovineia! debentures to the full amount was rc(|uired for the di.'lerence between .specie reserves and notes ontstanchnu-. It has .sei unci will wniiji wiiij, to (spjain t!iis system somewhat in d( tail: for while no banlv, sa\e the one al- ready niditioned, accepted the oHVi of the i^ovi rmiK nt. HISTORY OF {'AXADLW MONETARY SYSTEM! ISO yet the sclienie w".s an important one. In essence, it involved the principles since ac'opted m issuing- Domin- ion Government notes. These were issned alter the confederation of ISC.T. Allhon^'h the terms of these is- sues have been modiiied from time to time, yet tiie un the pound sterlin<,^ and were to be le^^^al tender only in \ova Scotia (.'U \'ict., c. Kl). In the revision of the bank act in 1S70 i:V^ Vict., c. 1 1 ) it was i)rovided that each bank shouhl hokl usually half, and never less thai» one-Miird. of its cash reserxe in Do- minion notes. In s<. far as such notes held by Ww banks were not covered by specie, the pro\ ision nierelv meant a foi-ced loan without int( rc^l to tlu' novcrtimcnt. Sir I'rancis Ilinck.s. who was tluii linance minister, to all objections merely replied lliat be was oblined "to con- tend in the interests of the public at laru-e that they were entitk'd to some share in the j)roiits of lireulation." This j)oliey, sulijected to mudi criticism then as now, has !)een maintained to the present day. Sir i'rancis llincks, by ji finlher act (.'{.'{ \'i(t.. e. !») considerably enlar^i'd the yenend circidation of D(»min- lon notes Iiy caneeliii'4' tin pnvik^^e of larger issues than f -\ 190 MONKV AM) 15A\KIN(; $t l)y tlic l)aiik.s. The ai-raiioenicnl iV,!- isMic and rc- (lcn)])ti()ii l)y one of the chartered hanks, in f'(»ree since 18()(), was l)n)u.) pel- cent of the debentures (20 per cent of the circnlalion ). and was never to l)e less than 1.) per cent. Issues in excess of so.ooo.ooo were to be covered bv specie, dollar for d(.llar, and of notes so covered tlie issue to any (juantity necessary mioht be undertaken. •22G. Later h^ishilion mnrcniin;^- Dominion notes. — This measure 'to regulate the issue of Dominion notes" was intended to rejjroduce that |)art of Peel's act of 1S41. which established a?i issue department in the Hank of KtiM-land. Sir Francis Ilincks believed that 'the functions of the issue (le|)artment should be automati- cally confined to the exchange of oold for notes and vice versa: that an amount can be established that way. with pciieet safety, to be issued upon public securities, and all beyond that fixed amount, in u(,i,|;' In 1H7-'. till' government beini; in need of funds, it M-as provi.lrd (.-{.J \'ict.. (• 7! that excess of issue over JfD.OOO.OOO miu-ht be permitted ai-ainst -rold holdin"-s n\' hut 3.5 per cent, 'i'he Liberals, who came into power in i:-^!"). chauired tjiis renuiation {HH \iet.. c. .5) to .)() per •'•■"< i" ,U'»M l''>r the amounts outstandiny- between 5f.0(M).()()() and sr.'.uoo.ouo .ni,| ,|ol!:,r for dollar a<.ainst [ilSTORY OF CAXADIAN MOXETARV SYSTKM 1!»1 circulation in excess of .'^TJ.OOO.OOO. .\,s the Dominioii (Xjijuuled, additional branch oflices of the vecei\er -i^en- ( lal's department were oj)ened in the other prox niees. Ill 1 880 the limit of issue against specie and debentures was extended to .$'J().0()().()0(). and the specie reserve re- (|iiired a<^ainst anything- U-ss than that sum reduced to ].") per cent; wnile. in addition. 10 jjir cent of the s-_'().000.000 was to be co\ ered by del.ientures of the Do- minion guaranteed oy the government of the Fnited Kingdom ( 4.'J \'ict., e. l.*}). Thirteen years later an ,i(t was |)asse(l (.'{ Kdw. ^'II. c. Ui) which raised the amount which \vas to be but partly co\e!'ed in gold and Dominion debentures to .'<:JO.O()0.0()0. In late years the Dominion goveinment has held a very large amount of Ui'ld as security for the circulation in excess of s.SO.OOO.OOO. The circulation of the notes has expanded \\ ith the demand for them bv the banks, thev having been ii(|uired by law to hold 40 j)er cent of their reserves in Dominion go\'ernment notes. The problems arising from this will. howe\ei-. be fullv discussed in Chap- ter XX XI. 227. lii'siill (,f Sir rrancis Ilinchs Ic-'.slatmn.— The Kgislation which was cai-ried by Sir l-'raneis Tlincks lias resulted in gi\ ing the Canadian Treasury some small j)rofit in its note issues. Tluvse notes have been issued in the I'nilowing denominations: 25 cents. $1, $2, >^K $5, $.')0. J^IOO. s.)00. si.ooo and $.).000. The banks are not jiermilled to issue notes for less than ><.'), but the fiave lo eaeli province of the Do- minion a nniforni system. The sinn-le .rold standard Mas then adopted, hein^'- that of the British sovereign of the weight and fineness ])i-escrihed hy the laws of tlic T/nited Kingdom. The sovereign consists of 12.'J.271. grains of stanihird, or 1I,'3.()()1 grains of pure gold, the slandai'd gold oi' (ireat Britain l)eing DKJ.OOH fine. It was enacted also that the gold eagle of the United States shonld he legal tender in Canada. The eagle contains 2;J2.2 grains of pnre gold. Silver coins were made a legal tender nj) to SIO, and co])per coins up to 2.} cents. Thus liritish sovereigns, American eagles, and Dominion government notes formed at first tlie only full legal-tender mone> . Bnt in 1!)12 Canadian $.5 and •^10 gold pieces were added; the act of 1871 stipulating that Canada shonld have a gold coinage of her own when desired. The Canadian SK) piece is of the same weight and fineness as the iVmerican eagle. It was not until i;)()8 that a hranch of the ]{oyal Mint was estah- lished at Ottawa, where Canadian copper, silver and gold coins are now nn'nted. There ne\er has JR-en any silver (jnestion in Canada. The act of 1871 estahlished an niuiuestioned gold stand- ard. As the Canadian hanks have furnished the country with a safe and elastic medium of exdiange there has hirn suflicient currency to meet the needs of the people. A good deal of jealousy, however, has heen shown to- ward the jx.wcr of the chartered hanks to furnish a paj)er medium of exchange to the people. Many have in- sisted that the issuing of paper money sjiould Ix.- the govenitiienrs sole prerogativ<'. Tliis prolilem, iiowever, ^vill he dealt with in Chajjter XXXII. PART II: HANKIXG C II APT KU XII XATL'HK Ol' (in: I) IT •220. Griffin and Linds of crcdils. — A ci-edit is a de- Icrrcd or jXJstpoiR'd jjayiiRrit of rii' dii-ectly upon the intc^-rity and ability to pay (>f the maker of the credit, and the date and conditions of ])aynient. Credits come into existence always as the result of an I'xchange, either the exchanne of credit for ^yoods, v'iedit for money, or ux'dit for ci'edit. I f A pui-chases ydods from li, ho Tuay tendi'r in payment either ^'old, liis j)ersonal check, l)atik notes. I'nited States notes oi- his own ])ronn'se to pay in sixty days. If the payment is made in yold. no credit operation is imohcd. If iiii'de by check or in l)ank notes, it repi'csents merelv a ti'anslei' ' .'' credit already eicated by the bank. If made m I'nited Statts 'otes it is likewise a tia.nsfer of cicdit, this time of (io\ trnnienl credit. If ])a\-ment is made by his own promissorv note. howfM-ri\ ■( new ci'edit, pa}'able at a - over a period of sixty (hiys. 2.'J(). f'.sc (if crcdil in indiislr//. -l^udvr our capital- istic systini of imhistiy e\ei-y enterprise i-ecpn'res cap- ital The cutnprcuciir must ha\e hnil(hn<^s. land, ma- chinery — a ^reat variety of capital <^-oo(l.s which make up the plant and e(iuipment of the linsincss — and he must ha\e the ser\ices of employes and raw matei'ials. Jle must prej)are for the \ai'ious expenses of the busi- ness — wanes, taxes, etc. If he is not a capitalist him- self and cannot induce ca})italists to share with him the risks and profits of his business, he must borrow this property t'roTU otiiers, i\il these ()b]i<>-ations arc credits and must sometime he lialions I. cause tlic inorR-y so obtained is to Ik- usid in iHTiiianfiit in\('stinciil. and the ohliyations cannot he redeemed e.\- (v|)t hy reriindinu'. TIk. himherman is ol' eourse a iiianuraetui-er hut his proihu-t is not always ([liiekiv eon- '.'■rtihle. W'Ik n a ])anie eomes. i)eoi)le must still have I'ood and elothinn- hut they ean ^et alony without huild- in^' new jiouses. 'rherel'ore lumber is one of the first commodities to feel the dei)rcssion throu<>li u fallinir • AV in demand. A complete linnhcrinn' industry will own a saw mill, a supi)ly of timber sutlicient to last for a number of years, and a (|uantity of manufactured lumbei- piled in 'he yards awaitino' sale. In tiiis country lumberineii e always been lar<^e borrowers. 'I'he price of lum- " r. and the Aalue of timber land ha\e adxanced steadilv \\itli the decrease of tile availal)le supply. Luml)ermen iia\e been quick to t;;!:-' 'dvanta^^e of this condition, and have always been ea'ations thev iiuMirred in the original purehase of this laiuK hy issiiinu' bonds seemed hy all their real property. These bonds are nsiiailv sei'ial. a eei'tain amount of them matin'ini)' e\ery year as the timber is cut. The ad\ anta^^v of this method of borrowing is obvious. '. /nl\- a fraerion ol' their indebtedness nuist be met each yeai'. and thev know lu-fori'hand just what tliat amount will be and can pre- paid' for it. When thi'y borrow on short-time notes and a panic occurs, they may tind it veiy ditlicult either to sell theii- product or to renew their not* Almost tbeii- entii-e indebtednvss is likely to Ix-omc due within six months, and if conditions do (.,• ..nproxc. there i> Urave daniici- of l)ankruj)ley. It is jjrobable that this condition was lar<4ely responsible for the bi^' slump in the price of .Southern pine followini^' the panic of 1. L()ii;i-ti>nc horro'iciii;:-. — Naturally the < ntrc- prcncur wishes to l)orrow monev at the lowest possible rate. Dui-iui^- periods of easy money he is loath to re- tire his short-lime iudcbtediicss on which he mav be payin<4' 1 per cent i)y the issue of i)onds which will cost iiim r> ])(■)• cent. .\s money hecomcs ti<4iit. howexei", he lucomes anxious to make this change, but often the time lias ])assed when the maiket will absorb his bonds. Thus, in an endeaxor to obtain the lowi'st rate at all liiiu's. thci'c is danger of his finding himself in a tii^ht money juarket \y\\\\ all his obligations in short-t imk.' lorni. 'I'he .idxaiitanc of |oni»'-timc borrow in j"' in ci'r- lain lines of indiislrv is so ob\ ions, howcxci'. thai sai_jaci- Miis business nun will often sell high-rab' bonds wbiii the commercial ijh is much lowci'. knowing that in the !'>ng nu! their interest account \\\\\ .iM'ragc lo'> er, .and that in case of panii" Iheii- situation will be much more secure. 'I'M. ('r<(/il I (■(iiioiiii.i s lilt iisf o/ i;o/, ho\ve\ti-. h( lon,ys to a later eha|)ter. •J.'iS. Lii/iii(l/ili(,ii of cr('i\ in,u the pioperty as seoui'ity fo!' tJK credit. The pi-olits of industry are inert iuL;'. Ik nc( husiness men are stiainin;i' e^crx ner\'e to increase their husiness, 'I'o (U) this tin \- must oiitain cr<-dil. l-'inllnrmoi'e at such times hankers he- come accustomed to seeing" yoods sold and credits litjuidated. and they lo;in moi-e fi'cily, 'I'Ik ir portfolios •AW full of lime credits, matnrinii in the future, aetpiired in exchanye for (Uiiiand ciichts (hie whenever called for. At such a lime snpp(»se a political or linaneial dis- turh.nice sh.ikcs puhlic conlidence in the ahility ot dihlors- especially l>anl(» ]ii 1- cent of onr exchanges. 'The issue of ercchts intended t'oi' eircidation l)y pi'i- '.;i.t< persons, corporations and hanks has ln( n attcnch'd so nuii'h aliuse in \hv ])ast that n'oxcrnnicnts ha\e me to re<^'ard it as a (piasi-puhhc i'unetion which inn>l he i-(.\yiilatcd sti'ieily. Accordingly in this co;intiy the iianks ha\(' lost the powci- to issue tiaie l)aid< notes, and lan onlv issue notes secui"c(l h\- a deposit of ;4o\ nnnicnt liMuds with the I'nitcd States 'I'reasury. Oui- l)ank notes theret'ore arc really ( io\ eiaiinent honds con\t rtid Mito cui'i'iaicy. Isach note is sini|)ly a IraiiURiit of i l"ind stripped of its interest and payahle on demand. •J+'J. Dc/xisil credit. — The other foi'in of circidalin<^" ii'cdit. or ci'cdil i'urrene\ . consists of cheeks and di'afts drawn against deposit ci'rdits. The enj-rcncy is not the rlicv'k or draft Imt the deposit credit itself: the ijocu- iiient is siniply a tcin|)()i'ai'y foiin which the deposit takes foi' ciiculation. 'I'lie di'awiny and payin.> th( note issues oT the hanks exceeded their (hposits. In that year deposits lolled ahta.l somewhat, hut it was not until ihi- national hank act m 1H(>.) that till \ were yiven theii- I'eal ini|)ttiis. Since that time the (l(po>its ha\f inci'eased out of ail ijid- jjortion to the iiicn a of the capital invested in Iiank- iii^\ while the notes have materially fallen oil' in anionni. '2r.i. Kldslinlji (,f (h'pasit crtdll.-- 'V\\v reason for this condition is to l)e found, of course, in the increase of |)opidation and the conse(jueut oi'outh of the hank- ing- hahit: l)ut even moi'c im|)ortant than these factors in its oi,,\\th has hecn its innate ahility to provide a inedium of cNchanu'c which expands and conti-acts w itli the hiisiness needs of the country. There are certain times of the year when exchanges increase n'reatlv in volmiR-. this condilion hein^' partienlai'K- true of siu'de comniuiiities where industries aic not ^reatlv varied. ^foreover. as husiness heconu's hrisk or slack, Iheie aic (han.'ics in the volume fiom year to vear. This necessitates a constant cliaiii;-e in the amount of the medium of exchange. Cnhss it is a |>eriod of m'ncnd speculation and ertdits rest uixiii an unstahle hasis. this change in the demand foi' midium will he met auto- maticallv hy an increase oi' deciease of checks and drafts drawn aLtainst the dt |>osit curreiicv. W'c shall see lairr on that this is the only eui'iiiiev in use in this countrv that had this atfrihute of elasticity. It is oh- vioiis that the issue of hank notes which must he fi/st se(aired hy drpusil nl ( .ov ( rniiK nt honds with the 'l'iiasin'\- IS exeeediiii^iv iiulastic. l^^ii NATlKi: (JF C l{!.l/ri il)o Il;i\iii.u' ('v)nK' into cxistciicf ;is the i-csult ot' an cx- (■lian<4C' transaction, tiicsc circulating' credits scr\c as a medium ol' e.\clian,y(.' in a nuniher of transactions hel'ore lli(\- are extinunislied. Tliey are usually li(iuidated by cancellation of one against the othei" tatliei- than hy pay- ment oC money: so that the exchantits which they ha\c made ha\c not merely ])ost])one(l the actual transfer of mone\' as in the case of the non-circulating credits, 'i'lie fact that they ser\ c tlu' |)ni'|)ose of money and are Usually setilid hy ca.ncellation misleads jjcople into supposing that they oln iat( the need foi- money. That siich is not the ease tliey leai'u sometimes to their sor- !ii\\ wjieii th(.i'e comes a u'c'i'ci'al demand for the re(lem[)- tion of credits accordin;^' to their tenor. The vohimc of credits contracts wliene\cr there is liiiuidation or whenex^r the credits hecome de|)reeiatt'd in \alue. As loni; as the dt I tor (.'ontuHRs to meet the matured ohli^ation In mi»ney their \ahie is maintained liut wlKiuvcr he )•( fuses to do this \alue hi-wins to de- cline concuri'cntly with the chances oi' future |)ayment. A credit depre<-iated to half its par \alue has lost halt' its power to do money woik and is conti'acted half as mucji as if it had heen liiiuidated. Inasmuch as crtdc can serve the pui'jxises of money ^ \ en hettei' than mone\ ilsclf, no person wiiuld ever de- mand mone\ unless lu thought ;t moi-e \aluaI>U' tha?i the credit, thai is. unless, in his opiniori. the \alue of 'he ei'tdit had d( preeiated. Such a depreciation could take place oidy when contidenee in the aliility of th( debtor t(i pay was imj);!ii'ih that he have i)roi)erty which is onhnarily eoinei'tihle into means of payment, for when the (U- mand for licjuidation comes it is likely to fall on e\cry- one at once and no one will care to |)art with money. Safely foi- the issuer of demand creihts, therefore, lies oidy in kei'pin..- ;,t all times a reserve of money sulli- cient to maintain confidence in his ahilily to pay. Tiiis reser\ e is the hasis of outstanding- credits. •Jit. (;(,lil iJic Ini.si.s for (ill credit. The hasis for hank credit is resei'\c money. All of this reser\ e nKMuy exeejjt ^old coin is hased more or less on the credit of the government. It is kept at par with <><)ld lieeause the ,«io\ ci'nmiiit stands ready to i-edeem it dol- liii- foi- dollar upon (kniand. In ordei' to meet |)ossil)le demands for rede?iii)lio!i thi' o(,\ (rnnieiit is reiiuired to k(rp a ordin;!iy time and nxrcntile '■'■•■''i' "'' •'"■ n.-itioii is hased upon hank cre.ht. o-ovf rn- tu. lit credit, money and ^(,1,1. The f iihivti-ates the idea: ollowiim (liayraMi «#i NAiTKr, oi- ( i*i,i)ri 2(t; M(i( .■mtilc ;in(l 'liiiit' Cr-iiit. ,, , ,. , , ( Hunk Votes. 1 Deposit Currency. ('■(ivirmiirnt ("rcdit Money. L Gold. •Ji.j. lifscn'r. — The t'ssciitial Icatiirc of the hank is its powtT to Ucx'[) oiitstaiuhn^' a mass of non-interest liiafin^' demand erethts. either in the form of notes or deposits, whieh it has issned in e.\elian<;'e t'or interest liearin^- tinu' ei'echts. To keep these demand erechts Milt, the hank must lia\e the eonfidenee of the pnhlie. This it aetjuires hy its capital and reser\ e. 'Vhv re- M i\c re))ri'sents to the depositor his ])roteetion, shoidd in' choose *o re(iuest imme(hate reck'mption of his cre(ht; the ca])ital and surphis, represents his idtimate pro- Iretion. The national hatd< act re(|uires that national hanks 111 central reser\ e cities ( Xew ^'ork. Chicago and St. Louis) shall keej) a c.ish reser\-e of "J.") per cent of theii- oi landin<^' demand credits. This rcser\e consists of Hold, and (io\ernment ci'cdit. 'I'he <>eneral rese)'\e cities, of V. Inch there are forty-nine, must keep 2.5 per cent reser\e with the privile<>'e of de])ositin<4- jialf of it n centi'al reser\ e cities. All other national hanks must ivci'P a 1.") |)cr cent resi'r\(' with the j)rivileg'e of (lej)osit- in^ .'J-.') of it in reserxc city hanks. '2U\. Kfj'cct of rcsiTi-(' r('(/iiir('in('>i(s. ~'V\\c amount of reserve which shoidd he kept hy a hank dei)erids npon 1 1., . 4- I' :»- i i III. I V |V.i(ll. I 1 • !!..., 1 i i i i V \ :ire due to other hanks they are more likely to he called t'oi- than if till \ -AVI' ill th( h.-nids itt' lar<>e nnnil)ers of •t|"'!;- UUH MC ;:\ AM) HANKINd people seattered over tlie country. The aniomit of re- serxe nceessavy eaiiiiot he (letennined \)\ any fixed rule. 'I'lie purpose of t'le reserve reiiuireiueiits ol" the national hank act is to put a cheek on undue e\[)ansi()n of de- mand credit hy the ha.nks, and forhids tiiein niakiny further loans as lon^r as tlieii- reser\e is helow tlie le^al rciiuirenients. hi |)rospei'ous times this operates verv well, hut times of ciisis and strin make new loans or to renew old ones, and withdrawing- its deposits from the city hanks. The effect of this is to inte: ''y the strin^'cney. The proper i)olicy would he to loan freely so that solvent firms may not he compelled to suspend heeause they cannot i , .- i ■..>,■....), ■ :..!,. ^ '.-^ i ■ ■. iiinumerahle homes if all this tiemendous calamity was nniicccssai-y and remedialilc. then the subject is one \ II II ' i LI.;;- 210 M()M:V ,\Ni) iS.\NKi.N(. oi' tiic greatest Imiium interest, well worthy of the at- tention ol' trained investigators and master minds. We have progressed I'ar enon^h in onr stndy to reahze that the sole eanse of some of onr panies is the misnse of the eredit niedinm and that it is a leadini,' faetor in all of tjiem. Abnormal and sndden eontrae- tions and e\j)ansions of eredit disturb the eeonomie e(iuilibriiim by eausin^ iluetnations of priees, manipu- lating' profits, and (ksti'oyiiiH' the sj)irit of enterprise among those who eontrol the industrial aetixity of tiie nation. r* i' ^•' CHAPTER XIII EIIKCT OF C HIDIT OX PRICES •J 10. ///r;vY/.s7 //.;'■ need of more efjie'ieiit inotiei/. — We ii;i\u already scrii that the use ol' crccht afreets the gen- ial level of j)riees by iiKTeasini,^ the etfieieiiey of money. Were it not I'or eredit tiie price level unist always he lixed by the rates hetween the amount of goods to be ( \ilianged and the amount of money in eireulatioii. ])ro- \iikd of course that the rate ol' circulation remain con- >^tant. As ])0])ulation increases, more goods are produced and more exchanging must be done, hence prices are certain to decline unless the supply of money is increased or rendered niore efticient. Declining i)ric(,'s Ksscn profits, the inccntixi' to iMiterjJrisc is deadened. ilie factors of ])ro(iuction become idle and depression is rlironic. A develo])ing counti'y. therefore, to be healthy I (oiiomically must ha\ c a constantly increasing quantity • I the medium of exchange. This need has been met by credit, chiefly in the form n\' bank credit. In the preceding chaj)ters the several kinds of credit have been discussed and it may be well til consider briefly the eff'ects of each. -.)0. Effeet of unn-eireiddting credit. — The use of Hiii-c'ii'culating credit (promissory notes) has very little H'ect on ])rices through any economy of the use of Hioney \\\m-\\ it brings about per sc. Such credits must be settled at maturity in money. Hence the use of ;in.iicy ]S p05i()0iicu iatiiui iiiiiii win uiled. il musi he i'emembered. however, that the use of non-circulating .'-'11 ;2i! MiiMV AM) H. .\KI.\(, !;• tM credit, while it raeilitnti s prodiu'linn and llius increases tlie aniniiiit of transactions, at the same lime ureiitly in- creases th" mcchnm l)y its i-reation of circulating^' ci'edit. The manner in which non-circnlatiny' cr'cdits ni'c con- \(i'te(l hy the hanks into cii'cnlat ini^' ci'cdits ha> ali'cadv heen (lescnhed. Hnsiness men issue promissory notes, (liscomit them at tiu' hank and recii\"e in exchan^'c I):miI< ci'edit (.'it'ici' in ilie I'oriii ot' nott»s or de])osil accounts. It is this (Kpi.isit cun-eiicy which has in tliis counti'v remo\ ed a ^|•^•al^•l• nait of tlu' hui'den of e.\( lianijinu' ^oods fi'oiii 111' sjini.'di I's of aioney itself. I'fohahlv 7.') per cent of oni' excliaiims are ])erfoi'med hy the use of cheeks and di'afts di'awn against these deposits. Mo'ny must In h to '_'.") per vci\[ ol tlie oil I si and mil; en dits. 'riiesc checks and dia fts. w hilr they are merely pmmises to pay mou' y and theoretic- ally must he r'di ( iiied in mone\ ai'' so cancelled one ai^aiiisl the other thai iitlle actual money is used. 2.")1. ('(nicilldlicn (>f ciidil. l-'or c\;imple, ht us take an is ihited coniiiiiinity in which there art' twc hanks, tlu deposits of each heiiio' Slno.OOO. ;iiid thi nioiuy I'csci'xcs S-J .").()';(». A. 15 and t' are local hiisiiiess men: .\ and 15 !i;i\e deposit accounts with one hank ;ui(l (' with tlu nlher. If A ni\cs his check to \\ in pa\ iiKUl for ;4'oo(ls, the check will !»e d. posilid h-, \\ ;ii;'i his accoimt will he crcditiil with the ,11 iiit of the I'lieck. whili's As airount \\ill hi chari^i'd. Thus i^'oods have I'cei! c.\chan,ue(l solely Iw credit. If .\ ^ives his t'lieck t(i (', it will he dt posited in ("s hank, ;ind thcorcHc- ally ("s hank m.iy expect A's hank to |i'i\ Ilie check in iiHiiiey. il IS proii.ihic, ji(iw(\er. that i ;icli l»ank will Hold hecks di a w II on i h' nlher. in \ liicl I i'\(iif ()nl\' El'l IXT oi" cm DIi ON I'lxK !"S ;n:i ;ii (liU'cR'nce ill total anKtiints. or baLincc, will l)c set- ;i;il ill money, in this mainiri- tlu' clircks arc cantvUfd ■mr- a^y'aiiist the other without aii} use ol' money. It is m')\ ions that In lari>'e eommunities. whi.iv ii is eiistoii!ar\- ':■ ii.akc s( tt l(.-iu( Ills hy cl'i ■: !<. tliis caii-'cl iat ioii hccoines I ,'y i!ii]).)ffatit . IIow \( i'\ ii!i])0!'tan! t!; - eiisinm lias lieconie \\i!l he sf.n when Ihi liin;'l;ons of the ehai'im^' hdii^e iwv discussed. •J.5*J. II(>ic Icx-scncd (Icindiid far itioudi causes rise hi i/vVc.v.- Thus moiuy is nsed hy the hanks only as a :t sirve a<4'ainst actual ',\ithdra\\ a!s ol" luoniv and I'oi' the vcttlemeiil of l)alanccs. Tiie ellicieney of the dollar is Ny this system mnlti])lied several times, hence the de- . ;id for money is lessened, and prices l(, nd to rise. The introduction of (h.is Nirni of cicdit must alwavs ' i' an im|>oi! uit inline net' u|)on |)ric( s. \\\ ])oorl\- Mid communities \\liei-e iiafikin^ 'acihties are mcayre tile nierchanl and the farmer must keep on iiand in their cash drawers m- pocki ts sullicient mouc \' to ae- eomphsh tiicii' i)urcli;:s' ^. il is in"ou\ ( iiieht to make |t:'yM;ents hy clicck: in fact, if th(\ did so. the cheek would prnfai"!', lie ro||ow((l h\- llie del!\er\ of jielua! !'ioney. 'I'liere is uo way lu which (hev'k-> can he can- celled against eaeli otlur. With the eslaltlishinent "\ l)anks and the i^rowth of lh( ellecl^in'4■ hahil. Iiow- tver. the necessity lor earr^inij- ahout larirc amoimts of actual money is o\('rcome. 'I'lie demand foi- moiwv is tliercoy lessened, am. prices ayain tend to rise. 2.").'?. Klf'cvt (if ii'ilioiKil haul,' notes. — In the chapter "W the nature of credit th( dill'i leuct hetwicn tht true hank note and the naiinual hank rx.tc was descrih(il. Iiiasmncli as the national hank notts ai'e secured hy i iCtYv iijiiii ill i . iiiis, "\\iiiCri tirc llH m i' jiiUl; iui'' (lOV- ■ riimcnt eicdits. tlu\- ciieulat( freely as nnau \ dsell' I i* .1 ii - * J2l-i -Mo.vi:'; AM) H.\\KiN(; TIrIi- cfi'cct on prices, therefore, corresj)()iHls to tlic efiVi't of otlier I'oi-ms of (ioveniment e'-edit. and will be discussed under !liat lieadinu'. •i.54. Jidiil.' nates and chcchs dilfcri n'iaUd. — It hds been ah'eady staled that the (nffereru-f l)et\V(en the de- j)osit and the true bank note is one of ,'nrin. It remains, however, to describe the (HftVrenee in t'niiii before the effect of true baiik notes 'ipon prices can I)e considered. The chief (htfereiice is that the baidv note is payable to bearer, whereas checks and (b-afts— the foi-nis in which tlie dei)osit currency circulates— are usually di'awn in favor ol" a dt'tinite pa>ce. Bet'oiv the check is valuable it Miust be endorsed by the jjayce, whereas the note cir- culates V. ithout endorsenient. I'urtlicrniore the value of a check de|Hnds U|)on the si/( of the dej)osit account l)ossessed by the maker oT the check. Thus checks do not ci"culate as freely as notes l)ecause both ()ersonal and bank cicdit .are inxohed. 'I'liey usualiv rctui'ii tn the bank i)romptly for ndemption. whereas notes may i'liiain Mitstandin^' for considerable periods. Because notes arc nuant t'or wider circulation t! an checks, they have Ik en licnerally iiido\»e(| with ci'rtain preferences o\er deposits that eiialile tiiem to meet more readily the demand for hand to hand nionev. 'i'lusi banks I ay be eomiH IKd to keep a l.aru'er and speeilic rescr\e for !h(ir i( demplion. or |)erliaps a unaranle- fund with the (iovernmenl : or ;is in this country tin notes may l)e a first li<'n on all the .assets (d' the bank and be .secured by tli( pledge of (.oxcrnmeid bonds. 'I'hat there is danger in endowing- \\u \\- securitv with too m- Hexible provisions. S(> that once issued they become a part of the actual money supply and ju'c never j)i-c- senit'd ior redt nipt ion. \\ \\\ Ik se( n when our own bcini> noti' syst( in is deei iIm d m a subscijiient ejiapt KFFKC r OF ( KKDir ON PRICES 21:) The true hank note, that is. one whieh is not secuicd. hy the pled^ic of spccidc assets or a deposit of honds hut \^ .if pi'ict ami di^t riliijt inu its i Ifeets in the least harmful \\a\ , llle,U'itiiiiate '^p( ■iilai ion increases lluctuations of price, either tli!'oi:i;h Iradiim in imiDi'an.H' ol' conditions nf supply and d( iiiand uv i.y niaiiipiilat in^ the markc! and causing t, inpniary ciianLi'es which arc iidl iustilicd '•y ■^I'l'l*') and demand. It mak.- ]triccs ahiHtruiai. iisiiallv aliii(irm;dl\ Iul:!! a! lirst. ri>Mnwcd hy a period w hell llicy air afnoriii.',II\ low. l»uck( t shijipiiiM and mei-e o'amhiiiio' im j)ricc (liic- tiiJitiouN are not relVri^d 'o lure: thoiiuh rcj)relicnsil»le in tli(iiisclves and iniuiidiis to puhlic morals, thev do not ( \erl any elfi i I mi prici s. It is onl\- wluii |ti'o|>- ert\ Is actually hoiiuht and sold, w Im-u the d< niand and supply an' altc i'(d. tli.il cjiaiim s in price result. -'u. llo'c sjx'ciilation nui// hi Imlh rfin\f dud (■//'ret of a r.-.si ill jiiirrH. — 'iV* Imi\ propcriy. one i list h;i\c mean of payment. Spccidalion rci|uires that tin speeidator -# I i'M:( T OF C'Hl.Di'l ON I'liK i:s III mist not only li;ive nicinis ol' payment hut tliat he must ic aide to hold j>ro[:ei-ty out oi' the market for ii time. Ill spei'ulation. tlien. eapi'al. instead of heiii^ invested ])ro(lueti\ e entcrpri'-es and addiiiu' to the supj)ly of Is. is locked ii]i ill li'oods in the hopi' of profit not !'\- ])ri)diiet i\ (■ increases hut h\' a ri>e ol' prices. Pro- iliictive prolits arise i'rom an increase in the amount or utility of ,n'oods; s])eeulali\ i' profits from aitilici'd scarcity ol' ^oods. .Speculation is hotli llie cause and t ircet of pi'ice l!iictii;itions; a natural increase of price \'. ill start, often, a specuhitive hoom whicli soon makes mices ahnormally hiy'h. C'recht is the instrument of spei-idation. It furnishes ilie medium of I'xchanuc which iileases prices tiinpor- iiily t I'om tlieii' depiiHleiice on mone\'. and jxrmits ;li(m to soar. It enahles persons with small ea))ital to |)iirchase and lio!il property. If credit were unknown and e\ery e\cliaiii4\' of projx ily rei|uired money, spec- ulation would siill exist on a small scah : iione hut cap- italists. howe\ei\ could (linage in il and tlu money which was di\eiied l(» the speciilali\e hiixiiii;' of one rMiiinioditx would he withdr.awn I'rom otlKi" usi s. and liie |)rices of otlu rs tliiiiLt's must fall. A 1^(111 :a\ spec- lijativc mo\inieiit, therefore, would lie inipossihie. So far we ha\e spoken ot' the ell'i ct of the various lorms of credit only as com))ar((l to a s\slt m in which iiiit IS iiol used. This was eipiivalent to coiisideriiiL!' ei( ly the ell'eet of an increase or expansion of credit. I' nniaiiis llierefdic to exaimiu' the ell'eet of prices of I CI ml ract ion of eredii . •J.')S. /),/'((•/ '//■ ')iir cnrmicii .si/slrni. — T'^iiforfun- lely this is tile ureal defect of our credil s\stem. I 'n- li^e e\|)ansi(iri. wincii is liia'iuai and aiw.i\s lakes piaee II answi' iiiouex. conlraction of ci'cdit 218 ^rONKV AND H.WKINC; is likely to be very sudden. Moreover, it is likely ti oceiir after a long period of expanding credit and ris- ing prices; therefore the contraction and consequent fall of prices will he the more acute. We have seen that credit dej)ends on confidence that the debtor will be able and willing to meet his obliga- tions. If anything occurs to destroy this confidence, there will be a general demand for payment. More- over, it does not always take some givat ])oliticaI up- heaval to cause this disturbance, particularly if credits are greatly e\])anded and prices high. Any decided fall in prices in any great industry, due perhaps to con- ditions entirely j)eculiar to that industry, may cause a general slum]) of the stock market. This shrinkage in values causes doubt to be cast on tlie ability of debtors to pay, and such credits as are due are j)resented for payment. To meet these obligations, debtors must sell their goods and ])r()perty. Since no one cares to pur- chase, prices decline sharply, to be followed by still greater distrust, lower valu( s. further selling and so on, with cumulative effect. This process continues until a large portion of the credits have been li(juidated. This condition is not attributable to credit itself, but to our particular system. The great desideratum of a credit curreiic-y is elasticity- tlie power to r\])and when it is stretched and, what is more important, to contract of itself when tin- |)ull is removed. The amount ol nadily acceptable medium of e\ch;uige should, liow- ever, exj)and (juickly and without restrictions when a general demafld for liijuidatioti ajipears. Hence if the banks could issue notes freely in times of panic, a vast amount of credits might be li(|iii(laled without resort u) a depiction of tsank reserves. i lie < !}■( ct of li(|uida- tion on j)rices. therefore, would not be so eumidative. Kii'r.c'i' OF cui:i)rr on phrks ^li) !i should not remain outstandini;' l()n<4'ei- than there is an actual demand for it as a medium. AVlien times are prosperous and ])r()lits inereasin^' with rise in ])riees. stoeks lend themselves readily to speculation anil I'or that reason are a|)t to he ahnormally hi^uh. All the money in existence, however cannot be said to he in circulation, and hence is not oll'ered for goods at anv one time, liesides the limitation.s on the num- her of exchan<4es which the average dollar can niaUe within a given time, it fre(|uently haj)i)(ns that dollars aie hoarded for loi\ger or shorter periods; until they ai'c again put into circulation they might _just as well he iini\-existent so far as their effect on prices is i-onci rned. \Ioreover, the amount of the crtdil mcdimn of exchange wliieii is oll'ered I'or gooils constantlv \ aries. i ta I i > (I CHAPTKK \IV (i()\"i:i;\.Mi,\-i' ( Ri.iJir < ii;i! i:\cy 2.')9. ( !,i.'-:,//if(ilii,ii i,f ;:;iivcni incut credit c/irrcnc//. — A lar.yv niiUMinl nl' the moiuy .siii)|)ly (.f tlu' riiit-d States coiisisls of CoMi'Miiuiii rrcdil. I 'luk )• thi:, luad must he classed the i;ir not its contents oi' conx nlihility, hut its cxclian^e utility that fixes ils \alne. Ci'edit money is a piomise lo pay eillier fia.t or com- iiUMhty moniy. i i' it is a diiect promise to pav. it is ■-"!'! to !)e I'edeemal*]' . ;-l Kasi as ion^' as the promise !■> kept: if the rcdeiupl ion !-. sii-^peialed or if it does not ih pi^nd upon a direct pnaiiisv to pay. hut upon its cus- t"ni;iry redem])tio!i hy ilii- ( io\ eiaiment. it is said to i>e ii redeemahle. The diii'ei ri;e;> hetweiii iriH deemahle ei'edit and lial ii:oney is tliai '])'■ ;;()0(1 laiih o! Ilie (Jo\- ( rnment is pledu^il to the redemption of th.e former in spite ot a ])eriod of suspension and its \alue ',\ill aluaxs !■(• iiifhienei (1 liy the pros])eet of its actual redemi)tion. ■jrd. Factors (h'tcniiiiiiiiii tlic vdhic of cntlii nniiu'/i. - Since commodity money deri\es its value hotli froni the \alue of the metal it contains and fVoni the need foi' ii as a me- the C'i\il W nv as their redemption sr;nn(l inuuediate or I'emote. i his was not the soU' reason. Iiowivai', for their fluctu- ,;tion. Within narro\\er limits the relafi\e \alue of ricnhaclss lo n-old and of i^nods to irre( nhacks fell ilh each additional issue of notes. 'I'liis caii hardly he 1 1 ..:i.. . 1 .1 I . I 1 : (• ii. . 1 ii. : . i .. i . ill 3 ii ium more uncei'tain: if tlu' ( io\ ciaiment coulil redt cm at ■ill. it x'.oiild mai.L' little dillVi'ence whetlur th( re were 11 '< - > i ooo MO.NKV AM) I{.\NKING SIOO.OOO.OOO nu)iT or less. It can iiioiv rca.sfM-.!,iy |„ attni)iitt(I iiKTcIy to an iiuTcasc of tlic money supplv, wliicli in itsi ir was snflififnt to raise prices. It is iin- possihle to reach any definite conclusion as to how miikIi of the liiK fualion was caused hy each ol' these in(hlenee^. I'lit it isclt';;r that they were liolli at work. In fact, wiien after 1S<;8 tlie (iovcrnnient siispen.iM! entirely tlie retirement of the -^reenhacks. they ei.n- tinned to circulate and even rose rapidly in value. Dnr- ino- the year that followed they were practically Hat mone; draw inn- their value solely from the demand (ui them as a medium of exchano-e. In ISC.'.), jiowever. Congress passtd what is known as the Public Credit Act. j)ledo-inM- tlieir icdemptlon in coin, so that they re- sumed their character of ertdit monev. •iC.-i. h'isk in free ti.sc of credit //;o//e//.— The theory hehind the issue of credit money is that it economi/es the use of o-nld and i)revents price Ihictuations. Its most ardent adxo. aUs claim that it can become tjie sole medium of e.xehanoe in a nation witere confidence in the n-.,vernm. lit and its ability to redeem in no|,| js maintained. This confidence can be sustained l)y a re- serve of noj,| upon which the country will draw only for t!ie purpose of payino- f,,,- imports. Furthermore its supply can be ren-ulated and adapted to the varyinir need-, of industry: at least Mich is the claim. That' it is a dan.i^erous device, howevei-. the hi-tory of ahnost cverv nation shows. •J').'J. h't\iiulati,,n of credit ///o//(V/.^That credit money eeonomi/.s the use of nold is evident: lien.'c so far as it can be issued without ill eflVets, it must be a !)/ ii.fii o, •■ 1. .,(;,>., 'v\ .1 I • • -^ tion. The cU'cct of any issue of credit money on j)rices and ..n the money supply has alrta-ly been "mentioned. (.i)\ i:un.mi;ni' ( i{i:i)rr c ikki-nc v i)o;J I'liccs risf ht'cjMisc there is niovc c'ii'culatiii^j;' iiu'dinni; tlii^ iiicreiiscs imports wliieh are always ciuiek to take ;i(i\aiita^e of a risi' in pi'iee: ^old Hows out of the coun- try to pay for the imports. Prices tlieu fall somewhat ill the issuin<4' country because of the loss of <^<)l(l, and v\^c abroad: in the end, world prices are readjusted on a liiLiher level. This will take placi' \\h(iie\er there is an issue of iirdit money, \vhether it is I'edecmabk' or irredeemaltl''. As lon;^' us the issue is not excessive, tli;it is. as \ou;j; as Uii' amount of credit money issued does not appi'oach llie amount of ^old formei'ly in circulati1(!. IIk crfdit PDncy is said to !k' ilcprcciMti'd ciincnc)-. 'I'I'.is will take |)lacc' U^ui^ hd'orc all tlu' <4o|d lias lucii (lii\ni out of ci'-cnlatioii. 'I'jic standard oi' j)ric(.s w id l)c a d(!!d)lc one; i^onds will \)v pi-iccd so nil id i li)|- ,L;o!d. and a i^rcat-i' amount !'or tlir credit niotiex'. ■_'(;i.. .Orr/cr.v to iimniiaiii v/iliic of crcdil iiKiiicf/. It has liccn Hie history oj' ci'edil nioiuy tliat cirorts arc Usually made to kec]) llie credit circniatinu' at |)ar with ,yi)id hy making it lcL',al iendei'. This mean^ that il must he accc|)ted in paynunt ol" all dehts. While tlii l'catiii-c increases its elliciency as niotiey. and theoretic- ally makes it a iiiore ])ci'('eet sul)sti[iite foi- ydld. it is a mistake to cencliide that ii will ])r(\('nt d 'preeiation. \Vi ha\c seen that Ihe \alue of ( reihl mont\- depends ii)st upon the prosp. ct rA' its rcdcm|)tion and second upi/ii its suj)piy relali\e to tlie money work which is to he done. Tiic leija! '(iuh r stamp does not increase the ])rospect of redeiiiplion of icdecmahlc credit, hecaiisc for that the ,l;o\ (.i-nmer.f "s faith is already delinitelv pledged. It is only when credit money is irredeemable that niakin/;' it le.ual tei;der to i)i'e\ent depieciation is hene- licial. In this ease, the ;^o\ernmtnt is not alread\- dcl- initely plcd-^cil to redeem the credit, hein-e anythinii attaclu'd to it which is an e\ idencc of the _ii'o\ ernments ,Uood faith inci'-'ases puhjic contidence in its re(Iem})tion. The piomisi' to aeci pi it in payment of debts to itself is (>b\ iously an e\ idencc of its purpose to redeem. 2<»."). f/'/T-; /•//'"( 7,7 rr((lit iin/ "idifil iii(,iu\//." It must h' aduiitted i:. support of tiio^e theorist, \^■ho advocate I'le nse of u-nvernincnt cr( dil as the "ideal moiiey"" that i' has hi ell tri(d Usually under Ihe most inaiisijicious c:reunislances its issue ncneraily ha\ inu been rcsortt'd '.\ars or to maintain pros])eia't\- whi( ii ti > oiii\' to Ini; 'ic (;()\ iiKN.Mi'A'i" ( iii;i)ii' ( ruiii.Nt ^ ::i> lias already <4;r()\vti im1i(.'altliy. If it (•(uild ln' issued witli the sole aim of steadying prices under I'lm- (litioiis wliieli woidd necessitate its rcdeaiption wlun the nei'd tor it disappeared, it might Itecome a \ery iffeetive instrument in the hands of a com])etent gov- ernment. Its issue on this theory is im})ractical)le, however, hc- eause automatic redemption is impossihle. When eon- tidence in the government is genei'al, all forms of credit issued hy it find their way into the clKUinels of trade, causing a rise of prices. As long as confidence is main- tained, they will continue to he a part of the monev sup- |)ly hecause there is no motive for their redemption. 'JG<>. Difficulties of adjuntintr suppltj. — Moreover, it would he unsafe to give to Congress or to any associa- tion of hankers the power to expand and contract the money su])})ly artificially. Congress 's not always well iid'ormed of the husiness needs of \he country; and hankers must always have personal and selfish interests. The effect of a sudden contraction of the money su[)ply as seen in panics is well known. Moreover, the power to regulate the money supj)ly would include the power to inflate or de])ress the price level. We are forced to the conclusion, therefore, that this credit has heen well named "ideal money" 1 y the theorists; "ideal" because it presu])p()ses a state of technical knowledge on the part of legislative hodies and .d)sence of self-interest which we may expect with the millennium. Irredeemable credit money may circulate at par with ii,()ld if the issue is not excessive and if there is general confidence in the goverrmient. In this case the govern- tiipjit line jidf niviiiiic<>f I fri ri>) tho mnnp^' Imf it fir>f>« *'*' i .'* SO in practice, receiving it itself at par with gold. This is not fiat money hecause it derives its value not entirely VII -15 % 226 MONKV AM) U.WKINd from its exchange utility hut from tlic /rovcniment's actual redemption. The silver dollar has heen a good example. Unfortunately, however, government credit money has seldom heen issued in response to a demand for money as a medium of exchange. It has heen issued largely in resjjonse to the li: ca! needs of governments, that is, to meet extraordinary increases in current ex- })enditures- 'J()T. Prrji'diccs nffdinst government credit monetj before 18()1. — This has heen especially true of the Ignited States. The Constitution gave Congress the power "to borrow money on the credit of the L'nited States"; also "to coin money and regulate the value thereof." In the Constitutional Convention a proposi- tion to enable Congress "to emit bills of ciedit was de- feati'd, it being the sense of the T'onvention that j)apcr money was dangerous." The history of the Ciovern- nient shows that the dislike (>f paper money, no dou!)t a survival of the days of the Kevolutionary bills of credit, must have continued until IHOl. Oti ordy three occasions prior to diis time had t'casury notes becii is- sued, namely, during the War >f IHTJ, the panic of 1S.*{7 and the Mexican AVar of ISiT. ^foreover. thr aggregate of these issues amounted to otdy $1 I(),()()(),- ()()(). ;nid ill ewry ease the notes were interest-bearing, and n( \ei- attained general circulation. 'JfiS. rinanciiif/ tin ('nil ii\ir. The opening of tiie Ci\il War brought extraordinary con(hfioi\s. Money had to bi iaiscd at once tor eonductiny the war, an» . of weakness ace sel- dom analyzed. Our prospciit\ -ratois point with pride to tlic fact that the I 'nitcd States is the oidy nation in liie world wbicii can sell lionds that pay cnly 2 per rent inl'ics'. This is applauded as an e\ idence of j)ros- perilx, witl.oui .•ina.hsLS. wit!" no thoupb! lb;!! \\>.i- mvv |>resetice of a (h l)t on the books of anvone. excn of a nalioii, must always be a weakness. In what respect ( -I I OOV! MOMA AM) HANKIN(; m 11 !i should a yoxminicnt's financial activities diifer from tliosc f)t' a \\(ll-ic<4ulatc(l husiiicss' Do not the same principles nriikrlie them hoth' The husiness man will n-^t horrow until lie has already devised a lime and method of jiaymcnt. As we have already noled. the I'orin in which he will horrow depends upon the disj)()sition he wishes to make of the credit, ir he expects to add to his fixed capital, he will horrow hv issuing lonn-time credits, expectin<^ either to pay them Milt of his profits oi- to rene\r them at maturity. II' he merely wants the use of funds for a short time, he will issue sliort-time or demand ci'cdits. These he w ill expect to meet out of tiie proceeds of his sales. •J7('- (roirnnnriit drhf. — When a j^-overnni'iit bor- rows it does so for current expendituiis. These may he for permanent imj)rovement. such as federal build- ings, harbors. caJials, which will benefit the public gen- erally and flu cost of which should be spreajl over the j)eriod of their usefulness rather than be met out of 'lie re\c"iue of a sin^''le year at the time of ex{)enditure. .V fa\()iite expression is "to let posterity ha\e its share of till' burden." The ^o\ermnent bonded dei)t in 1870 •unounted to S-_\;{.'n,l()'. >,'.).)(; ; in l'.»()-J it had been re- duced to .^^'.CJ.-i.Ol l.(;.'ii». 'i'h( income of a "^'overnmcnt is ;ncnerally s})oUen of as re\(iiue and is deiixcd entirely from \ai"ions methods of taxation. If wi' wish to cany out the analogy be- tween the ^oxeiiiment and the Imsiness man. we may say thai the di Its iciiccs bctwce?) the rcMiiue and ex- penditmcs in any one year are profit, and that it is with this profit that thi' bonds are retired. The issue of bo!i(]s, tlii'ri'! <>re> \\b<,'!! the !>roceeds a.re n.ot souiui- (icred, rests on a firm business basis. gum:hn.mi:nt credit currency oo on The issue of credit iiioney, however, pre.seiits diff'er- riit j)rol)leins. When the husiiiess man issues demand credits he purchases something sahihle with tlie j)ro- eeeds, and expects to he in a })osition to retire the crecht at any time. The oovernment on the otlier hand merely spends the money, usually to meet some extraordinary expenses, and then has nothing to show for it. If it is a war that has heen financed, as in the case of our green- I)acUs, it iiad a perfect right to horrow for the jjurpose just as it would have to make permanent improvements hecause, on the same theory, posterity should help hear an exi)ense from which it will henetit. If it does that, however, a provision for redemption on demand must he made hy the estahlishment of a suflicient goKl re- serve; hut to rest on a husiness hasis, more is necessary. Posterity should not hear the !)urden hy keeping the re- serve always intact hut hy actually retiring the demand credits. l{e'"per business policy would be to avoid the issue of demand cn.lits. in spite of the original savinir of ;„. tei-est. " •272. rrovislon. for rrfinn:^- dcht.- \u any event iowcNc.- whether a d, bt .o incurred is in the ■form of I'oiids or notes, provisinu for its can.-ellalion sluudd be ma.le. The smalier the d.b'. the oreater the nation's '""•".muin. pouc...,n.l tliereisnotcllin^when thisbor- rouinupowermay beMe..ded. II is„..l a correct busi- Mcss pohey to aHnu a debt Ineurn .1 durin- on<. period "1 stnss t,, .villain o!itstan!'()(!!!ct!')!K u»>dcr a thoroutrb socialistic regiine these institutions would be Mj[)ertluous. S31 4 232 MONEY AND BANKING 274- lii'iutpihildt'uni of fundamental principles. — rndtr our present system of private ownership of weaKli and the division of hibor in {)ro(hiction, frecjuent transfers of ownersliij) are i-eiinired. Kxclianne is an absolute prerecjuisite to any hut the most primitive form of i)ro(hietion. Only an insiuglil together and organized in the most ellicient way. The number of persons who KCONUMR 1 LNt riON OF THE BANK ^33 arc capable of heconiinf,'' organizers of industry — entre- preneurs — is limited, and these are not usually the own- vvs of capital. If the coniniunity is to utilize the expert abilities of these ca})able but i)ropertyless entrei)reneurs, a method must be pro\idc(l by which they may come into possession of cajjital without bein- payment. A ci-edit, therefore, is a contract to pay money, and is usually evidenced by a written instrument for the further protection of the creditor and for the purpose of making the contract negotiable. The fact that credits in the form of negotiable instruments are transferable add enormously to their utility as media i>f exchange. 27(5. Jiaiih- a dealer in credits.— 'Vhv business of a bank is to deal in credits; it is a market for the pinrhase and sale of credits. It is an institution the fimction I if which is to assist in the exchange of goods by facili- tating the use of credit as a medium of exchange. It is with credit as with any salable commodity — the exist- ...w..> ,>P .. ..... ..l-,.t^ ,..1 :i 1. Ill 1 I 1 ■::v-. \ri ii ii;.;: r.-^ ■.. ;-. ;:-^:l ;; i;;;;", ;;v" Jiwiigiil iiiiii ."XJuI increases its use because a demand for it is always assured, lianks are an economic beneJit to liie commu- Rl ii'.ii ^iom:v and banking Hi 1 1 '■R ii *p( ' r h riity to the extent that they promote the exchange of goods and services, to tlie end that the material resources (capital) and the labor force shall be most advanta- geously emjjloyed in the best possible organization and that the finished products shall find their way, with the minimum of delay and difficulty, to the best markets. Every excliange. excejjting mere barter, involves the use of a medium of exchange. Money and credit are the two media of exchange. The term "money" is now used by economists to mean simply the standard of value which, in most countries to-day, is gold. Where the gold standard prevails, all other forms of currency — token coins, government notes and bank notes — are credit currency. The government usually undertakes to provide and regulate the metallic coinage of the coun- try, but leaves to the banks the task of providing and handling the credit currencv. 'I'he Tnited States imes further than most European countries in concerning itself with the credit currency of the country by issuing "greenbacks," and Treasury notes, and by guaranteeing the redemption of national bank notes. In England, as well as in most of the larger Yaiyo- pean countries, to the banks is delegated the function of managing the credit cu"rency; of course, under re- strictions more or less stringent. The point to be observed in this, and one \\hieh has been urged by sev- eral of our rec^'t writers on money, notably C'onant in his "I'rinciples of Money and Hanking," is that the iiandling of credit, evi-n of credit currency, is properlv a banking funetio?i ratiier than a governmental oiic. Credit jis a medium of < xchani. <■ varies in form all the way from a national bank ooti , whicli na.sses from hand to hand as freely as a gold coin, to a mere verbal promise tr> pay (. \ idcnccd by a niemora!idum in a ledger ECUNUMIC FLNCTIUN OF THE BANK 235 wliich, often as it has served in one excluingc, is but rarely negotiated further. ^Vrranged in the onkr of their negotiahihty (tlieir servieeabihty as nie(ha of ex- cliange) between tliese two extremes, we liave the cer- titied cheek, cheek, draft, l)ond. ])roniissory note, etc. 277. lianlcs supplij a medium of iwclian^c. — Hanks perform the function of sup|)lying a me(hum of ex- change in two ways: (1) by the issue of hank notes intended I'or general circulation, as the national bank notes, and (2) by granting, in exchange for a cash de- ])t)sit or an interest-bearing note, its own credit which can be used by the customer as means of payment by drawing a check against the bank. The function of providing a medium of exchange for a community is essentially a public one and is pecul- iarly liable to abuse if left without restriction in the hands of private parties. Before the Civil War this country suffered severely from badly regulated issues of bank money and, since the National Bank Act, the right to issue paper money has been limited to national banks under very strict regulations. 278. Hanking is a quasi-public function. — The right to furnish a medium of exchange by the system of checks and de]>osits still belongs to every bank, but in all cases it is regulated cither i)y federal ov state statutes. In the Ignited States minimum cash reserves are re(iuiri(l to be kv\)[ and in many other ways the i)iiblic nature of the business is recognized. Besides the quasi-public function of jiroviding a me- dium of exchange by the use of credit in one form or nnother, banks liave anotht r function closely allied to if- titlfl <.-<\«>tjitll^^i>(.' (.'/Id l>f 1/ ill' 4-(t l\it jIi .^:., ,„..:. I. ...J I- to supj)ly temporary capital to industry in the form of short time loans. 'JIG MONEY AM) RANKING In th 'd>j;(-\ scarce any iiuhistrv can ht- carried (Ul without capital. It is very rare also that the best pn; iiioters and managers of industry are tlie i)ossessors of the large am unts of capital necessary to carry on the business. On the other hand, a large })()rtion oi' the country's capital is in the hands of those who have no ability to emj)loy it successfully or it is scattered about among tiie people. To get this cai)ital into the hands of the entrei)reneun ..iio can employ it most profitably is a function largely assumed by banks. •271). Tin- hank a (li.stribiitor of capital.— Cainial is employed in iiidustry in two ways. Some of it must be invested in the plant and machinery; this is fixed cap- ital. Another installment must be invested in materials, labor, incidental exj)enses of production, etc., the neces- sity for M-hich arises out of the length of time required to manufacture and market the product. There is naturally great variation in the length of the period of production in the various industries. In some of them this circ' ;ting capital must be tied up for Meeks, in others i'or wars. The distinction between circulating and fixed capital IS that the former ai'ter a period reappears in the form of a salable {)roduct from which is realized the value of capital invested and something more in such shape that it can be reinvested; in other words it is fluid, whereas Jixed cai)ital remains in the form in which it is invested and only l)eeomes fluid as a replacement or depreciation fund is accumulated or the plant is sold. This distinction has gre.it value in the science of banking, for as we shall see later, the credit which a bank loans has a very precarious existence and it may become necessary to withdraw it at any moment from the enterprise iti which it is invested. The restrictions K( ONOAIIC 1 TNCl'lON UF THE HANK j>;i' wliicli leoislal n\ has placed njxm the nianiicr of loans a l)ank may 'iiakc are vciilly hased upon this j)rinciple. 2S(). Ihuilcing priuciplc. — A lar^a- proportion of the hank failures of the country is caused hy a violation of this fundamental hanking- principle. The National Hank Act forhids hanks to loan on real estate or mort- oaacs. The idea hack of this i-, to ])revent the lockin<; up of funds ii fi 1(1 capital. The faihu'e of the three Walsh bai. s in Chic'^o in V.m\ occurred hecause the funds of tlic hanks had been used to huild railroads which some dav mav he \erv i)rofitahle, but which for the present tie up capital where it cannot he easily turned ijito a means of payment. The reasons why hatdv funds should not he tied up in the form of fixed ca[)ital are: (1 ) The value of the investment may he unstable. (2) The value of the investment may depend on the completion of the whole plant, as in Hie case of the Walsh railroads. (3) The value of the investment may depend upon a monopoly or upon the ability d' > ;ie man, so that if the peculiar advantage ceases to exi^ the property shrinks in value. New processes may nuike old plants entirely obsolete and destroy their value. 281. Double function of commcrcinl hanhs. — The function of a modern commercial bank is therefore two- fold: (1) To provide a means of payment and (2) to provide temporary capital for the use of industry. It will perhaj s he well to show brietly how these func- tions were developed. One of the early banks, the liank of Amsterdam was the conmn rcial center o\' Europe at that time, and the currency in circulation was a heterogeneous mass 1 .; I I L'.'JH MOXKV AND RANKING of the coma-c of all the mio-hhorin^v and .h'stant conn- tnes, of murrtain \ahic a..,l f'miuentlv Mmtllated S.K'h a currency seized the needs of connneree ^cvv I'a.Ily, and the J^mk of Anistenh.n, uas oroani/.e,: to reheve the diHicnHy. It received deposits of this niis- c-elhmeous currency, calcuhited its vahie on the })asis of a fixed stanchu-d and permitted the depositor to transfer l'>s credit at the hank. The deposits were all kept in- «act in the l)ank, or at least were supposed to he As ;i matter of fact, the si^rht of so much idle money seem- I'l^ly doui^r no ^rood to auyhodv in time proved too stron^r a temptation to the mana-enipnt and thev from time to time ])ermitted lar-e sums to he used in 'financ- ing,^ hazardous ventures, principallv the colonial enter- prises of the Dutch Kast India Company. When these tacts hecame notorious the depositors lost faith in the hank and it was compelled to suspend. This hank per- lormed a hankino- function in diat it provided a ^.ood iriedium of exchanoe, h„t it did not deal in credit in any other sense than a -rain warehouse man mIk) is sim- ])ly under ohii-ations to return the deposit on demand. _ In the IJank of Knu-hmd {nm} we find the hunk- in^r i unctions considerahly developed. In considera- tion of a li)an to the ^nnernment, which at that time wis m sore need of tunds, the suhscrihers were given the exclusive right to organize a hank which should have the privilege of issuing notes payahle to the hearer and which were intended to circulate as currency. Here we have the essential element in "hankino-— an organization which is ahle in some way to create credit at small expense and which it may loan'out to the puhlic, deriving an income therefrom which leaves a nrh nrofif above expenses. In other words, the bank is able to 1!^- ECONU.Mh 1LN( IIUN Ul' IHI-; HANK ii'.i\) ])ro(luce somcthir;^'- cheaply and to rent it out at a (rr- taiii rate per cent. The f'ollouiu^tr features were a part ni' the creation of the credit of the Hank of Kn<>'la(id: (1) A siihseriptioii of funds nhieh sliould he loaned to the ^oveniuient al 8 per cent. (2) Notes must he jirinted, counterfeitintr guarded a<,''ainst, an othce for doin<,r husiness and redeeming the notes must he maintained. (.'J) A demand for currency nrust exist so that the notes will n^main oulstandiiiir. 282. Peculiar privilege of hankers. — There arc a ^reat many persons and firms who can create credit, hut the hanker is the only one ahle to dei-ive an income from loaning it out. The reason of this is that the hank- credit is in such form that it can he used as a means of payment and, therefore, will he received and held by the puhlic so long as there is need for it to do the necessary work of exchange. Naturally a husiness in which the stock-in-trade can he produced at very little expense and can be loaned out at from 5 i)er cent to 2.5 per cent per annum is peculiarly attractive and liable to abuse. Until the pas- sage of the National ]Jank Act, the United States had to suffer many and heavy losses through the insulficient regulation of this important function. It took us all those years to learn that the function of supplying the I'urrency of the country is a pul)lic one and should he delegated to private parties only under the most strin- gent regulations. lender our present laws the privilege of issuing bank- credit to be used as currency (the national bank notes) posts, the hank nearlv ss much, as th.e incojiu^ derivcf! from loaning the notes and, furthermore, a Inrgc part uw MONEY AM) BANKING of the con II try's need for credit currency is supplied by the <4-overniiient itself hy issues of "greenbacks" and Treasury notes. liy far the largest portion of the payments in ])usiness trnnsaetions are made by the use of credit in another form than currency, that is, 1 means of the check or draft. 'J'he service of the banks in providing currency is really insignificant when compared to their service in furnisliing a method of j)ayment by click. The essi'iitial element in the e!.cck system is the same as in the bank-note system, viz., bank credit. Instead of selling, or more jjroperly, loaning its credit in the form of baidv notes, at a certain rate pf-r cent, the bank loans the right to draw checks against it, which checks can be used as a means of payment, but to a much more limited extent than bank notes and with a much more restricted circulation. The principle underlying both systems, however, is the same. The |)eculiar cliaracteristic of a bank is the privilege of using its credit as a medium of exchange. This gives its credit a utdity enjoyed by the credit of no other organization except the government. IJecause its ci'edit has this uiiHty it can be kept outstaiiding witli- out the i)ayment of interest. The principal business of the bank is to exchange its own credit, in the I'orni of baid< notes or a deposit credit oti its books against which chicks may be drawn, for the i-redit of someone else in the form of a promissory note bearing interest. ( 'nder ordinary eircnmstanees neiiner the bank ?iotes nny the deposit credits beai' interest, conse(iuentl'- Ihe banK "-ains i)y the Iransaetion a gross jirofit e(]nal to tiie interest on the pro;iiiss(«iv note. In order to make this j)rofit it is necessary Ui.tl thr bnnk-"redit should be kept ouf- standini^ and not be returne(i to the liank for payment. ECONOMIC ruNcnox OF Tin-; hank ^n Credit is simply a deferred payment and this hank- i '. 'it represents a payment dne at any time the posses- eliooses to call for it; if it is in the form of a hank lie may present it for redem|)tion in eash; if it is ... the form of a dei)osit-ere(ht he may (h'aw a check and casli it at the l)ank. Now, if hank notes were re- deemed soon after their issne. or if deposit-erefhts were elieeked a their issue aic so many that their .haraefer is (|uile ehang-d; they [io longer rej)rescnt the credit of \hr issuing hank hut the ere.Iit of the goxernmeni in the shape of a I 'nited Sl.ihs hond. Having hern deprived of thi- one method of kee,)!n" I i III HI \!l Hi O It) MONEY AND BANKING 11! their credit oiitstaiuliiig by the issue of bank notes, the banks have made use ol' another nietliod, the cheek and deposit system, which serves the same purpose but which is more dilJicull to understand. •JH.'J. liduJcs ill) not create cdpital. — Dunbar says in liis little book, "The Theory and History of Banking": It I? obvious thfit tlic hankers cn'dtc no luw cajiittil by their letidin^ and deposit lioldiii^-, \n\\ it is e(iiial!y plain tliat the\' direct tlie stream of (';;pital to the enterprises and industries re- (juirinij; such support, and fliat tl \ quicken the succession of {•onunercial and iii(lu>ti'ial opirat ions. A ^ivcn amount of caji- ital is tiuis made more elt'ective, so tisat the re>ult of tlie introduc- tion of liankiiif;- in anv conununitv is the e!iu!val< nt of a coiisid- erahle increase of capital, althoujj;h not implying any real increase in the tir>t instance. Indrstry is impossible without two things: Capital and ni iiaoement. \\'ry frecjuently the class of per- sons owning the capital are not capable of employing it in industry to the best advantage, and many |)ersons of ability have no caj)ital. It is the function of the l)ank to bring the two together for their mutual advantage and thus promote industiy. It is important to get the distinction between capital and eapUal goods. Capital goods are those material things which are employed in the further production of goods, such as iiachincry. factoiy buildings, raw materials, and goods in the hands of merchants. Cap- ital is a certain sum of' vahr so many dollars worth from uhilaccmcnt and sitiking funds undir normal conditions. EC'ONO.AIIC FrXC'I'lOX OF 'i'lIK HANK x>l;3 A fju'toiv iiKiy he turning- out sonic form of capital uoods iiKu-liiuery, for example— and at the same time there may l)e entrepreneurs desirin^r to make use of !hat maelunery in ])ro(luction hut liavin^r no ready linids. J'he inakers of the machinery cannot ])art with the machinery mdess they ^et some form of medium nf exdiano'c nitli which to pay the'r hills for waoes, tnaterials, etc. The hank ste|)s in at this point and < iiahles the two parties to ,it.s of cash. On the hasis "f the funds thus i)rM\ided tin hank is ahle to create a •n-^^v amount cd' credit which. '\hcn loaned to entrepre- I'urs, serves the purpose of actual ca|)ital hecause with ' they can p";(liase the capiial goods thev re(|uire. I redit is a si 'slitute for monev in makin<> e\rlian"es \H 2^i MONKY AM) BANKIN(i and may be comijared to airships which in tlie near future may reiuler superfluous raih'oad tracks and right- of-way. 2H.5. Opirdliun.s of (i hanJc. — Tlie Dperations of a l)aiik aie tiiree: Discount or loaning, deposit, and issue. In diseoiMiting or loaning, the bank buys from the customer a m ii-cireulating crc(ht in the form of a prom- issory note and ])ays for it with cash or, what is much more l're(iuently the case, with its own credit in the form of bank notes or a (kjjosit crecht, either of whicli are cii-eukiting and can be used as a me the bank in exchan<>- or non-ciiviilatin^ forms of credit, i. e., proinissoi-y notes, eoininereial paper, etc. A bank note is a form of demand lial)ility sold i)v tbe iiank. It is simply the evidence of tlie debt of the ]rdi\k the same as an entry in a bank l)ook showing that whoever possesses it can claim from the bank a certain ^ im. The system of checks and deposit is a snlistitnte tor bank note issues and developed out of them. Kny- md and the T'.iited States are the oidy countries mak- ing extt -live ..>e of the system, the contine?ital countries still ciingin function that I be modein banker ha become the arhitei- of the direction of investment, the lU'^ani/ation if industry, and even of the fate of nations. Sim- ple as the process i> by whii'h the banke r tran-lVrs to others the -lored purchasing power «hich he has itluied up in small de- posits from his customers who have aicpiired i^old or tbe right 'o command gold, it is bis selection among tliese borro-sei's wbicb determines the cour-e of tbe industrial progress of the nation. lit lu-e it comes tbat Ibe bank(r. in tbe t"nancing of important enter})rises, can within certain limits dtterniine «hetb(r a given project shall succeed or fail. In e\erv growing commuiuty /. u uw MONEY AM) IJAMvING !;;» flu !• ii nuu'li of the rial hurdi ii of dccidiiig iij)()ri tlie course of its fuhire di'vclopnioiit liis with the liankcr. It is for him to (letcrniiiie the relative iiiar.'H!k. he will take it to the bank and increase liis de- posit account instead of askin^r for cash. As a rule the check will come into the possession of a person who is the customer of another bank and he will increase the (lej)osits of that bank. This bank will present the check to the bank, which is liable for its payment, for payment through the clearing- house. ^'et even now the debt(»r bank need not part with the cash, for on the preceding' day it has received o?i deposit from its own customers checks on the bank holding- the check against it. They simj)ly cancel off their mutual ol)li^ations, |)erhaps i)ayino- a small balance the one to the other. .Still the money remains in the bank. In fact, the oidy time the l)ank is called upon to redeem its demand obli-^ations is when a check is actually |)r<- sented at the tclitrs w indow for cash payment or when the balances at the clearing'' house are runnin;^- a<4ainst it. The bank statement in the followinn- chapter shows that demand liabilities (deposits) of the banks are usu- ally foiu- limes as \:\ya. Limits of cdniiufr poxcer of the hank. — The main source of the hank's profit is the interest received on loans and discounts, and it follows that the profit varies directly with the amount of loans made. What then is the limit to the amount of loans a hank can make!' The National Hank Act s Is no direct limit e\c(,|)t that it forbids any jiational hank to loiui to ;my individual or firm an amotuit greati'r than oiu-tiiith of the hank's cajjital and surplus. Indirectly, it limits loans Itv pro- viding that national hanks shall k(t|) a reserve whieh shall not fall below a ecrtjiio jx'reciitagi' nf tin net de- posits. When a bank gives a loan it must lithei- j)art with that amount of cash, thus reducing its reserve, or li must giv«' a (iep()() and a reserve of •$.'}()().()()0 (the ratio between them beinn^ \ ,'.\ ]..'j), |o;,iis >fie but the reserve has fallen from -t'JOO.OOO to S2()().0()(). thus chan^in^r the ratio of reserve to deposits to 1 :.5. which means that the reserve is (udy 20 per cent of the deposits, and this is below the le^al minimum if the bank is a New ^'ork national bank. Suppose, on the other hand, that the l)orrower accepts a deposit credit instead of deinandin^r cash. The deposits then increase to .$1.1()(),()()(), while the reserve remains as before at $.'{()(>.()0(), the ratio in this case risino- to 1:.'} 2-.'J. When thr borrower took cash, the ratio changed from 1 ::i I-.'} [,, i:.5; „|u.,, the i)or- rower took credit, the ratio clian^rcl Irom \ ;.\ \-'.\ to 1:.'J 2-;j. In the first case, the reserve was depleted below the leual limit; m the second case, the l.ank could still loan another ><1(M).()(M) before it reached the limit. There can be no (|uestion as to whether the bank would prefer to loan i's cash oi- its credit. 2i).). Cdsli (I preciotin eoniniodif// af liun.^ It be- comes easier now to sec the reason why ,-;,s!) j^ such a precious commodity in Wall Stred; not because cash is a medium of exchange, for Wall .Street uses very little '•'■' •' ••• ;:;iiis;iv iifiw^ iT> biiMiHss, iMit because cash is the basis of ciidit uliich /'.v the medium of e.\eh;ui^e. DEPOSIT CTRREXCY Ilfiice the rivalry among the hanks to secure cash de- posits, for cash deposits mean hirger reserves, hirger reserves mean new cretht created to three times tliat ■iinount, new credit means hirger loans and conse(juently increased dividends. Hence, also, the great disturhance caused hy the withdrawal o'' a few millions of cash deposits, such as wiien withdrawn hy the country banks to "move the croj)s." Withdrawals of cash mean de- pleted reserves, which condition creates a shrinkage of bank credit and a re(hiction of ])rotit-making loans. More than tiiat, the contraction of credit — the me- ihum of exchange in 90 per cent of the important transactions of the market — has the san e effect as the retirement of a large portion of the cii'culating medium. The effect of tiie movement of a t\-w million dollars westward to move the crops would he an unimportant matter if it involved the contraction to that amount simply of the medium of exchange; under present con- ditions it involves a contraction of three times or more of the amount. Those great accumulators of cash, the country hanks, the savings hanks, trust companies, in\istment coni- panios, and insurance comp-nies, ha\{ in their pox^cr the control of the money market, for the cash, at Mieir disposal forms the basis of a vast stiucture ot' credit oil which the business of the tinancial center of the country rests. The dangerous element in the situation arises from the instability of this foundation, for the withdrawal of cash from the i-eser'.es of the banks causes the eo!laj)se of the superstructuii . credit. In view o|' these facts the rate of interest which the >.'ew York banks pay tor cash deposits. I ' ^, per cent or •_' per cent, is a small matl( r. l"or i v( rv ddllar of casli dej)osited they are enablcl to loan eiidil to Ihice J2>G MONEY AM) BANKING times tlic amount at liom 2 [kv cent to 6 per cent, thus rnakino- a ^ross j)roHl of from .) per cent to 15 per cent on the deposit. The word "deposit" is amhiguous and has a dual nature. When u batiker asserts that he makes 5 per cent ^rross profit on his deposits, he uses the term as meanin<4- demand hahihties outstatuhng (excepting, of course, circuUitin^r notes) . A deposit of cash in a bank, however, rncans somethin^r more than an increase of that amount of the demand hahihties of tlie bank; it means an increase of reserve to tiiat amount, on the basis of which the bank is justified in increasing its demand ha- bilities by three times the amount dcposite(h and this it usually does if there is a market for the loans. On the receipt of a deposit of ^\{H)0 cash, the bank does not put .$-J.'50 in the reserve and loan -$7.50; it puts .$1000 in the reserve (for the reserve is not a special fund, but represents practically all the cash on hand at any par- ticuli.r time) and increases its loans and demand lia- bilities ((iei)()sits) .$.'}00(), if it is a reserve city national bank, or more if it is not. (See Section 4()1.) 2{)r». Prohlcm of the reserve of greatest importnnee.— The problem of what constitutes a sufJicient reserve is one that en^ra^res the mind of bankers at all times. The amount of credit which they can keep afloat and upon which their profits depend is determined by the si/e of the reserve which they can hold In tiieir vaults. It is obvious that if a large proportion of the demand credits are presented at atiy one time that the liank cannot meet them. This hapj)ens oidy when some event occurs that shakes flic conlidence which the dej)ositors have in the bank. If tlu- bank cannot dispose of its assets by bor- rowino- iiom the other banks, it must fail. In addition to this danger there are certain times of year, varying DKTOSIJ (I l{Hi;.N( V 2.v; in (iiffcrcnt localities, when hanks ineiease their reserves. It may he that more aetnai money is used in liand to iiaiul transfers, oi- that the l)anks expect a demand for local loans that eanses them to increase their reserves. W'heii there is any general movement on the j)art of the comitry hanks toward inereasino- their reserves, sneh as lakes ))laee every year when the crops stai-t to move, the withdrawal of aetnai money fiom the leserve cities eanses hank reserves there to fail in voinme. C'on- \ersely, when the demand for mon'y in the interior >nhsides, the money Hows hack into the reserve eitv lianks. and their reser\cs are tlins increased. Hence a reserve which is sntlicient at one time of year may not l)e at another: and reser\es which aie sntlicient durino a i)erio(l when the orantino- of creasis may he lamentahly insnthcient when there is a •ii'neral demand foi- iiijiiidation. 2!)7. LdcJ,' of CDOjuralion cdiiscs h(ut],s to lose ir- serves- [ 'nfortimatcly. nnder onr present system, there !s \(ry little cooperation hetween tin- hanks of dilfcrcnt cities wlieii demand for licinidation hecoines o-eneral. Kaeh hank docs c\ ciythiny in its power at sneh times li) increase ils it^erve, and it mnst all he ;it tlu' e\|)ensc • if some other hank. The ui'ite. knows personally of se\ cral hanks, each of which in<-reased its r( sei-\c diuiiio- ""' P""i'' <''■ I"<'7 iMitil it amount. (I to ;.> per cent of the de|)osits. 2!>H. MelJiods (.f 'nicrcash}^- rcscnra.- \[ sneh times there are only two ways of increasin«,>- the total of the conntry's hank i\ser\es miiii they heni,, |,, |„. increased antomatically In the oia.hial li(|nidalion of credit. The most coiiiiiion nuthod is to neoot iat. for ..,,ld ;.h.v..= = ! This is slow, however, and is apt to he e\|Kiisive. The second nielhod is i.v (he dep,>sit ol' (iovernment funds \ II- li M()N':Y AM) I'.ANKING J* — ,— .-A-. -I M itii tlic hanks. This was of ^yreat assistance during the ])anie of 11)07, hut it ecnild he taken advanta'^'e of hy the holders of certain securities which the (iovernnient oirered to aceejjt as colhiteral for the h)an. Since that e\|)erience the law has httii clian^ed so tliat the list of acceptahle securities has hvci\ ^ivatly enhir^'ed: and tl(M-e is IK) douht hut that the new arran^-enu'ut would prove of \alue if the expei-ienee should hi' rej)eated. This |)resupposes. however, an a\ailahle surj)lus of money in the Cnited States Treasury, on the presence of w Iiicli it is not safe to rely. 2!)!). Svc(ni(l(irii reserve. — A ^rreat many haidf honds falling oft\ they preferred horrowing with 111* ir honds as collateral to selling. es|)ecially as neither ■ ilternative netted them any actual cin-rency. .■}()1. G(n-crninciif Deposits. — Since 11K)7. Secretaries "f the Treasury hnw accepted honds other than govern- ment as seein-ity for government funds deposited in the iiatif)nal hanks. The adoption of this poliev. which has liecii recognized hy Congress as legal, renders various ' lass's ol' honds .-i \ Mlo.Mhlc a***-^'!^ i" t^inw. />f' n..i.;,. .1 ■ I ; I CIIAPIKK XVII HANK. S'I'A TK.Ml.N r Hl.SOl H( I,S ifi 1 ' f 'M)2. ('otnhiuc'd sidtcnn lit. In passing- iVoiii the tlir- oretic'cil to Aw ])i'a('ti('al (lisciission ol' hanking', it is will i'or the student to heeonie t'aiuihar with tlie hank state- ment. It is a siininiin^' np of all the transaetions oi' the hank — a eondensed reeoi'd ol' all the hooks of account - and every transaction, no matter how small. ])i-o(luees a change in the statement. An understanding-, therefore, of all the items of the l)ank statement will provide a ^•()()d introduction to the actual pi-aetice of tlie husiness. The statement reproduced in section tiOli on pai^e 'Jdl is the eomhined statement of all the national hanks in the country. The federal law provides that each national hank shall make a repoi't to the com))troller of the cur- rency at least five times each year. The dates for niak- iniT the reports are not fixed hut are announced hv the eomptrollei- at intervals. It is a peculiai'ity of the hank- in^' l)usiness that it may have a com|)lete re])()rt of its financial condition at the end of each day. In a mei-can- tile or manufacturinii' estahlishment it is ])ossil)le to ha\e such a statement only aftei- an in\entory of the stock r.\ 1 i.Mi.N r i{ix)ri{( i:s ;.'(i1 ;{(>.'{. Proof of lilt' ticjiti.sif (■Nrniic// llicor//. I'lirtlicr- iiioii'. the fiuiii'ts sliowiiiL'' tii(.' fclatioii lictwccii loans, deposits and i-cscrvcs. arc the best proof thai can l>c (■ffci-cd as to the vahchty of tlic (k'])osit-can'reiic\- theory presented in the preeechnu' chapter. It will l)e observed that tlie total voliiiiic of loans and (hscounls in the 7 ^■-<) naliona! hanks in 11»]2 was hnt little in excess of six iiillion of dollars. The in(li\ idual deposits, oi- the .iinount due to depositoi's of all sorts exc-ept l)anks. was a little less than six hillion dollars. The amount of rc- ■''■rxe. inchidin<4' the specie and le^al tender notes and .> per c-ent rcdcnij)tion fund, amounted to nine hundred million dollars, oi- 1.) per cent of the deposit liahility. Since the total amount of money of all descriptions in iliis country was then ahout S:}.4()0.()0().0()(). and since 'he (le])()sits in the state hanks and tiaist companies, com- tiined w ith the figures iii\ (.'ii. would ha\e made a total of M\t'i- Hfteeii hillion dollai's. it re(piires no argument to >how that the item '■(lc|)()sits" does not represent cash iKposited hut rathei' credit extended hy the hank. I'herc is not enough actual cash in the whole world to pay the de|)osit()rs of the l)anks of the United States if they should suddenly desire to exercise their le<>al right and all at once call for payment of their deposits. o\ii!iNi:i) m.i'oKis i{i:(^iii;i:i) n\ riii-: ( oMrriuM.ii-.it of I'nr: c riiifi'.Nc v i hom riir. \\rioN\i. hwks the 15 \\K SI \ii-.Mi;\ r. 'iAJi> HANKS. SOMMIUH -'ti. 1 '-* 1 .'. liF.SOrHCFS: 1. 1.11,111'- .'111(1 (lis(i)unt-- (III uliich iirticcr*. .iiid (lircctur-; Mr" li.il>lc, cither as |i,iycr"i or indiirscr^. Feins and di iDiints (in wliicli (itticci's and dirccturs an- iiot lialilc as payers or iiidorsci-, .'S l),().)^*.;w.^().'9.KJ J. Ovcniratts, sfciircd," ,$ — , imsccun-d. s— — ,'(i.K):i,(l()F.H ;i. r. S. lidiids to secure eireidatioii, jiar value T.N.IS.'.SHI.OO k L'. S. boiiils to >eeurf L". S. liejxisits. pur value 4i),ll).j,lO(l.UU 2fi'~ Mn\]:\ AM) !{.\\Ki\(; ■"'• <'tliir ImiihK Id s(ciiiT I . S. .Ir|ii,^its <{:(:{()") 1') I '-, !l.-i.-,|.S| S. HoikIs, .s.ciiritics. etc l.(i:i(i!fM .'!l)(il.:t(i H. IViiiking lioiisf. fiiriiitiiic ^iiul IIsIuits .'l,<,;!li>,SI)i)..>s IC. Other real estate owned -'!)!()7rtj).")0. '1 II. Due froiii iiatinii.il liaiiks (mil rcMr%e .ip'iiN) 177 JHllvLMi", I-. Due from stale hanks and iMiikcrs -'ls].>S!),;!:>S. V, l:i. Due Iroin approved reserve aiiciils 7H(i.l!)i».si).i..'l. II. Clueks and otiier cisli items.'. :il.'lllo!.">fi7!u I). i;xeliaiij.'es for elearin^:- lioii^e J7S,(i7_>,(i|i).;,;{ III. Mills of other national h.aiiks KU |s[j:{Ml() 17. (-'raetional eiirreiuy. nickels and cents :{.;{0(),:{i)0.i)7 IS. Specie (IS.'.:iJo]7JI.71 li). I.egal-tender iio'es 17(i.7 7(S,01(i.O() -'0. live per cent redemption fund S.>,|S(f,.'7:JX) -'1. Due from Treasunr liiited States 7,.5H:U(i()!.H 'f "'"1 .1)10,9(i,i,788,()17.()8 MABII/riKS: -'-'. ra|)ital stock paid in s l,i)t,-,.ll!).V-,s(l.()l) -'•*• Surphis fund 'loi.'Kifl.s:},!.;,:! -'4. Tnilivided |)rotits. less expense^ am! taxes -'fls.o<)7,.>,V,. | |, -'."). N'ation.d h.iiik notes outsLindinj. I JI,.)(IJ,I S.",..j() J(j. State hank notes oiitstaiidiiii: .'7,7(»l.(»() .'7. Due to other national hanks 1.0.j(l,l!)!»,i):i,>.!n J^. Due to state hanks and h.inkers U.MHS.Hd.SI ■-'!•. Due to trust companies and sa\in;:s hanks lli,».:ins,!i:i7,S| '.iO. Due to approved reserve ajreiits l:{.7!l!),:i(lt,(i:{ SI. Dividends unpaid 1,0:{,>.7,'{S.(;;! ;i-'. Individual deitosits siihject to checks. | M:(. Demand certificates of deposit. I ;U. 'lime ccrtilicates of deposit { J,9H..J()l.U(iiJ,91 S5. C'ertifieij checks. I ;?f>. Cashier's checks oiitstaiidiii;.'-. J .'57. I'nited .States deposits S:},.)!)t,l 1:{..'J .'is. I'ostal savinjrs (le|)osits l.j,()l:>,:n.").S7 :i!l. Deposits of I'nited States dishiirsin^f otlicers I -.(if)J.K'< -M ■UK HoikK l.orrovved .'!S.77 l,(iSS.7H 41. .Votes ,111(1 hills redisi'omited 10.77(i,J7. '.,)<) 4.'. Bills pa_\ ahle (iLKr).-.'!!.).,-,,-, ■i'.i. I{eserv<'(l for taxes 7.U7.!t7.j.Hl 44. I.iahilities oilier than those ahove stated l,71(>.;i<)7.s:{ Total .>>!10,9(J.i,7HS,iil7.t)^ .*J04. Ddiihlr-ciilr// .si/slo/i. - Tlic fi''st tliin^' to he noted about the >,tati!iKiit on tliis panv is lliat ihv t^ o coluniD.s of resources and liabilities exactly balance eacli otiier to the cent. The reason of tliis is to be round in the system of double-entry bookkeeping- by which everv traiLsaction is recorded twice, so that it is iiii])ossible to BAN K STATK.M ENT— RKsOl RC mi alter the cirdit or resource s'ul: without at the same tiine (•lian'4'iii^ the hahihtx oi- dthit side, lender this system the hank is considered as havin<^ ro projjcrty ol' its own, liiit that all its resources ahove its liahuities belong'- to tlif stockholders, and these resources are classified as part ol' the liahilities under the items cajjital stock, sur- plus funds, dividends, profits, aiul dividends un})aid. Tlicse items are liahilities of the hank only in the event of li(juidation. The fact that the resources and liahilities of the hank are ecjual has no hearin*)- whatever on its solvency. 'I'lie last statement ^yiven out before a bank fails inrariably shows the resouives to he ccjual to the liabilities. 'I'he tliserepancy must be looked for in some of the Items: either the resources have been put in at valuations above their real worth, or some item of liability has been omitted or reduced. ]t is almost always discovered in the event of a failure that loans and discounts contain items which are far less than the figures set down. ( nder resources are put down all the items of property owned by the bank and all sums due to be paid to it in tlie future. I 'nder liabilities are placed all the debts owing by the bank and all items representing- the e(iuity of the stockholders in the property of the bank. In other words, the liability side of the statement simj)ly indicates to whom the resoui'ces bel(jn<4' in case the bus- iness of the i)ank were to be settled up instantly. .30.5. AlfiTdfidiis in xtiliic of rc.s-oiirci's.—'Vht' items on the resource side may increase or diminish without any tiansactions ha\ini); taken })lace and therefore without any chanues iiaving been made in the liability side. ■**^ome of the Jouu-S mu\' ni'o^c to be bad an.d n.on-col- lectible, or some of the real estate or bonds may increase in market value; profits may be made or losses may be h 2()4 .MONKV AM) 1}.\\KI.\(; W ^■'i iiicui-rrd. It is iinpossihlc coiistaiitly to adjust tlic valiifs «4i\fii ill the statciiiciit to cori-'spoiid lo tiie real conditions. Ill sonic hanks the ad.jiistimnt is made liiriodicaily : in otlkrs only when it is discovcifd that th' ahcratioii of \ahif is jitrmantiit ; and in still others it is n(\c r made. .'}()(!. ("oiuralcd asscls.- It (V((|iienily liai)])ens that where tlie ii( itis of proj.erty ha\e eiihaiieed in value the fi«4-ures on tlu' slateuu nt ai-e allowed to reniain ahsurdiv low. creatino- what i> ealled ■(•oneealed assets." It is C'onsidirerl !)y a ureat many hankers an e\i(i(.nee of conser\atism to '•ontinne to list :it a low fi' as e\-eryl)ody under- stands the iT.d eondition and knows that t!ie statement is a fictitious one TJie ohjeetidn '() the praetiee I'omes I'rom the fact that ( wii the stockholders do not reali/.e H'.e full \alue of lh< ir stock and may ht induced to part >vi1li it at a prict' which thiy would not consider at all if they kiirw Ilice(|uily repriscnted h\- it. We shall iiosv tak( u|) (at-h ili m sepaiati I. wiih such t'X])!aMation-> as r-n necessary to descrihe the transac- tions hy w hi( !i it i^ creaied. ;i07. Ijxniy. mi/l ilisrninits. 'I'his item of assets is in the tiiini of pioniiss()i\ nolf s nf iiidi\idua!s or corpora- tions. 'I'll!' discount i(pi( stilts iiot(-, which ha\f hecn |»urclias», 'due ;it maiiiiily and tin price paid is called discount, and i.-. at onct credited to the prolit account, Mppearinu" under "lial)il!tics"" in llic item 'undixidcd pistils. ■ Loans.' I( clinically spiakiiiL'. rtprcMnts the sUlii jiiini wiii i(|ii.'ii ii ihc ia(( u; ijir iioie; ai maiuiiiv the hank will receive that amniinl plus the inli n st. The HANK >r.\'i'i:.\ii:.N r lii.soruc i:s ■:i{;r> i\\{Yvrv\K'v hctwccn loans and discouiits, thfix't'orc. is that ill tile case of loans the l)ank does not reahze its j)rolit until tlie note is (hie: in the ease of (hseoiints the bank lakes its profit when the transaction is made. Diseoiintin^H" has always been considered the jieeidiar iiiisiness of a liank. In I'eiinsyhania the trust coin- jKinies are not einpouered to discount, but tliey ha\ e the riyht to loan money and to purchase notes and other iilili^ations. The prohibition of discount does not i)re- \ent the trust com])anies from (l()in<4' a general banking' liusiness; instead of discounting they simply purchase the notes outi'ight or loan the funds on the security of the notes, taking the interest at maturity. On the back of the bank report are |)rinte(l certain schedules which must be tilled out in order to show moie ill detail fbi' meaning of the \ari()us items. The law proxides tli.it "all debts due to an association, on which interest is jiast due. and unpaid, for the jieriod of six months, unless the same ai'e wi'll secured, and in proci'ss of eoilcction. shall be considered Iiad debts within the nieaning of this section."' All such notes must be listed in the schedule, together with all notes which ari' ovtrdue and all notes re|)re- senting liability of directors as borrowers. While there IS no law limiting the right of the bank to loan to its directors on the same terms as to any oilier |)(rson. it is rceogni/.ed that the prixilege is likely to be aliiisrd and liciiee the banks ait- asked to make a s•,.! .I-... ..i.t . 1 1... .1 : If 1 I .1 ""' '''" '•■' •:;::;:;;;;;■ ;;;;\\;(n rin jno- \aiuc and HANK s'l'A ri:Mi:N r rksotkc i:s y()i markt'l \;iiiR' of tlif I'nitcd States hoiids owned by the li.-iiik. .'{l.'J. lioitds. securities, etc. — This item embraces be- >mI(s bonds, also stocks. eIiattel-moi't<>'a<4es, jud^'- iii( nis. ehiims, elc.. owned by the bank. 'I'be securities which are deposited by l)orrowci's as coihitei'a! seciUMtv iMi- loans do not appiar in the statement because thev :irr not the |)roi)erty ol' the l)ank until del'aidt has been iii:i(k' Oil the note. I'nder the law national banks are iKit allowed to own coi'Doraticfii stocks unless it is neces- •>a!y to take them in the collection of a debt. This item, ilui'cl'oi'c, I'cprcscnts practically the bonds owned bv the liaiiks. It has increasc'd ^-i-c-atly within the past Tew \iars. because many of the banks ai'e dealers in bonds iiid hold them pending' tlkir sale to customci-s. and fur- tliermoi-e because the ready mai'ket which is at hand un- il' r normal conditions for the bonds causes he bank to i'^iard tlu'm as a form of secondary rescrxc which can ahiiost immediately be conxcrtcd into money in ease of I iiicr^'cncy. .'Hi. liank to hold I'eal cstutt, as indicated ;i the follow inu- pro\ ision : .•>(i.s MOM N \\l) i?\\KIN(. r J' A IMtloiial l);inki!ii;' ;i -Miii.it Inn iii,i v [ill I'd i;i m-. hold, .•(iid coiix, \ ival ("-tatr for tin t'(illn\\ iii;^ |iiir|i(i-M -, ,iii(i i'uv no dtln i- : I'liNt. Such a> >hall hr iuciN>ai'v Cor it- iiiiiin'(hair acroiiuiKjii.i- ti(Mi :ii the ti'an-actio.'i of it- i)ii>iiu'>s. Second. Such a- -.hall he inort^^ai^rd to It in i;()iid I'allli h\ u .\ of si'cuiit V f'oi' (Kill- [)i\\iou-l\- coidract((l. Third. Such a> -hall he coii\. \ , c! to it in >at is fact ion (d" d. hi - j)l'c\loU>lv coiltractrd in the course (d' iU di alili^-. I'ourth. Sucii a> it NJiall |iurcha-r at -air, under iudi^iii'ii'-. decrees, or inortoaM-s held h_v the association, or shall [lUrchaM- to secure dehts due to It. But no such association shall hold the possesion of aiiv real estate under inort^aoi . or the title and possrs^lon ,if anv nal estate pui'chased to sicun anv debts due lo it, for a longer period t h.w! Ii\ e \ears. 'I'lir ohpi't of tills ])r()visi()?) is to ])rev('nt the baiik^ I'roiii inx tstiiio- tin ir resources in t'oi-iiis wliieli are iioi feadily eoii\ crtihlf into current I'luids. In roi'inci' years, before tliei'c was so iiiucli |)ro|)(.i'ly otliei- than real estate which coiihl he iisid as security I'oi' loans, the h.inks wert' ahtiost forced to take tiiort oam's oi- noth.iii" at all. In times (d' si riiio( ncy wht ti (Kpositoi's were de- inanchno' easli. Ilic h;inks were frecpicnlly eniharrassed and foi'ced into insol\enc\ hecausc thc\ could not con- \ t I't real t^late. which undir such eircunistanccs is always \try urisalahh cxccp} at a IrenRiidous sat'rilic(. into funds which would satisfy lluii' dcpositoi's. liW). Dili' fnni: iKilidntil IxiiiL's. Tllis re])i( scnis de- posits in other natiiiii.il hanks which niay iinl he counlid as pari of the n sri\e. .'JIT. liin frnin a/i/)r(f.((I lu srr: ( iKhiits. Prior lo 191.'}. the country nall(Uial hanks niioht d( posit in 111' 1 1 ~)i I \ t (iiu-<. iinii-Mi(iis oi I I.I iici rem (ii iinii BANK SIAILMLNT- liKSUUlit KS 209 |( posits i-c(niirc(] as ix'stTxc. In \hc reserve cities iia- lidiial l)aiiks lui^lit dejjosit oiie-iiall' of the 2.j \)ijr cent nijiiired in ceiiti-ai resei'x e cities. .'{18. ChccLs find other cash iUiiis — (WcJi/ai.i^cs far li't cltariu;^- house. — I'luler these hea(hii(», which are no^^ \(rv rai'c. .'{•_'!. lit dim jitioii fund. I'',\ery national hank is w- '|iiir(d !o ki t p on dt posit \\ilh iiie Treasurv of the I 'niti'd Slates ;i I und i (jiial to ."> per ei nt of its outstand- MiU' circnlation. Prior to IIM.'J ties dejjosit could be iinnt((l as part of the banks re(|un(il reserve against 270 II yU)SV.\ AM) RANKIN(, (Icpusits, and so worked no hard.sliip. The l-'cdcral I{( MT\ f Act resdi.ded this pcnnission, hut tlic total vlsvvw ix<|Mircd to he licld aoainst deposits was h.wcml hy much more than the amount of the .> per cent fund. .TJ2. Due from the Viiital States V'/vv/.s/zr//.— This Item inchides any amounts (hie i'roni tlie Treasi'iry other than the .-> per cent funch such as sums of leoal'tender money s ia|iltal than SIOO.OOO. ixri'pt iliat hank- with a capital of not li>s than S5().()()() niav. "ith thf sanctioii of the Si'iTitary of tlio Trcasurv be orcrjinizcd inv place the population of whicli dors not cNcccd six tliou- nihaliitanl-. and except that hank- with a capital ot' not '' >- than $','.■).()('() ntav. uith the sanction ot' the Secretai-v of the Treasiirv. he or-^ani/ed In anv place the popidation of uhich does not exceed three thousand inhabitants. No association >hall he nrfraiii/t d in a citv the population of whicli rxcrrds (iftv Ihousfiiid ])eisons «ith a c,ij)it,il (d' lev- than S'.'OO, ()()().' M a I ind n By this rcipiiriinent of a certain niaMmnm capital tor banks in towns of moi-e than a i'(-rtain population the act prohibits tlie establishment of banks with insuf- ' \,iliiiii;il U.iiik \(l, p. T. Hi MONKV AM) MANKINCi ficicnt capital in cities where the loans and deposits are hkcly to he hiri^c. ('ntil l*)i)0 the niiniiiiuin capital for a national hank was S.io.ooo; since that time it has l)cen J^2.). ()()() to encourage the estahlislinicnt of nat hanks in small towns. lonal Soc. r)!;}}). Tlie cajjital stock of cacli ;L-snriatIoii \i(li niatmrr as niav hi- prc-cnlxd ni the hv-Iaw-. or arti ('lis of asso- ciation. I'.vcrv [)( rxin l)cconiino; a sJiareiioicK r liv sucli traiistVr sh;ill. in proportion to his shares, succeed to all the rin-hts and lia hiiities of the prior holder of such shares.' :i'2i. Double liahilif// of slochholdcrs. — The sliares of sto(>k in a I)ank differ from stock in othei- corporations in the douhle liahility feature. The piinciple of limited liahility is an almost unixcrsal feature of corporation laws in this country and the stockholders cannot I)e made liahle foi' further payments for the stock if it has heen i ully paid. The idea of limited liahility is of course to make it j)ossil)le for pei'sons wjio are unwillino' to take uidimited i-isk in l)ecomin<4' partners in an entei-prisc to hecoine stockholders with a maximum risk of 1 wfdy what they have j)aid in. In the case of hank^ howc\(r. it has l)i('ome a tixed custom not oidv in th osm^r national hank act hut also in most of the state statutes to jjlacc a doid)le liahility on the shareholders for the hettcr protection of depositors; the j-eason hein^r that the de|)ositoi's are creditors of an entirely difVerent sort from the creditors of other corporations. Sec. .51.")1. The sh iar( liol(l( rs ot (Mry national hankm"- asso- ciation shall he held individual' \ responsililc e(|uallv and ratably. mil not t'or one another, (or 1 Nation. il li.uik Act. intriK (teht s, .iriil enjja gc- liANiv M.\ii;\ii,Nr i,i.\iui.n"n:s ilV6 s arc 1 f or hctn ioiial )r (li iroi)- ^iicli ii>tVr ili ■s ot ;ioiis litcd itioii ladc bt'cii ic- to take e to nks. ti le utcs the that so rt IS>1>- IDIV. IgC- its of ^ucli a>>()ciat ion lo tlic r\tcnl of t! oiiiit of tlifir ■k tlnrriiu ;it the |i,'n- '. iliU' tlicridt . in .uidition to tlic amount 1 >har(>. (Xi-rpt that >liai-('liol(lri'- of anv hank- ii\i>tr(l 111 -ucli >l 111^ association now (\i>lin<;- iindrr -tat V laws havinif not k'ss th 111 !^r).()()().()()() of capital actuailv paid in and a sui-plii> of ^0 ))( !■ cciituin on hand. l)otli to In dctci-niiiii (i hv the ( 'oinptrol! cr the ( iirrcncw s|i,i|| 1,,. hahir onlv t( amount invested in I III I r shares ; a nd such siirphis of '10 per centum shall lie kept leihmmished. aiui hi' in ad(h'ti()n to the surplus provided t' lor ill 'ills title; and if at an\ time theri' is a deficieiicv in such surplus if '>{) J.er centum siich association shall not pay any (lUKleiul ciencv Is made i;ood ; and in i-a» ti> its shareholders until the deti i)f such deficiency the ( "omptrollei- of the Currency mav compel sociation t ition to close its its hu-iiKss and wind up its aff tie provisions of chajilcr four of this title.' urs uiulor .'J2.). SuvjiJus fiind. This itciii sioiiiHcs that a cci-' ain ])()rti()n of the resoiii'ces in adchtiori to the capital pa id in l)eloiius to the stoekhohlers. 'I'lie siirjjhis is ■ reated eithei' l)y cash paid in at the or,oani/atioii of ne hank in ad(h'tion to tlie capital |)ai(l. for which no stock is issned. or it i-eprescnts profits which ha\e ac- 'iiMHihited and wiiich liave not hten paid out in (h\ i- di'dds. The idea of tlie surplus I'und is to provide an item ill the liahik'rics which can he used to I'cprcsent chan<>es 111 the c(piity of the stoekhohlers in the rest fves without altering the capital stock. If the I»ank should suil'er a loss of resources in any inanner heyond the amount ■ A' undivided pi(dils. thr capital of the Iiank would lie ipaired if it were not for the surplus. A surplus is i'e(]uired hy law under the following ction : ill \(itii>iial WiwU Act. VII IS .T. 1 MOM A AM) iJANKINd lij Sec. .")!!)!). Tlir (liiTclor^ of ,iii\ .o^oci.ition mav scini-aii- iiuallv (Irclarc a ilisid.'iid rf so miicli of the lu t profits of tlic as sociatioii as tliiy shall .juil.nc i'\|)<'(liciit : l)iit cacli association sliall. Ixtorc the dccla rat ion of a dividiiid. can-v one tenth pail of its net jirotits of the prcrcdinir half ycai- to its surplus fund untd the same shall auuniiit to ^H) ]nv centum of its capital stock.' .A liluTJiI surplus ciiliancrs the credit of Ww hank and for that reason new hanks l'rc'(inciitl\- start wi'h a surphis of .50 or 100 per cent of the capital snhscrihed. Tliis proves an advantaof in se\eral ways. The hanks are re(inired to puri-hase fewer honds than they would if the whole investment had heen put into the capital. l\\ states where the shari's of the hank ai-e taxed on their [lar vahie it reduces the personal property tux of the liolders thereof. On the other hand the smaller auiount of capitaliza- tioiv reduces the i)o\\er (d' the hank to issue circulatinu- notes and until the recent aniendiiient to the law I'or- hiddino- the hanks to loan more than 10 per cent of their c.'.pital and sur])!us to any one person, the' hanks were jcslricted to 10 per cent e)f theii- capital alone. The faed that the shares of stock represent the e'(piit\- of the holders not only in the- ca])ital hut also in the sur])lus oi\(.s the ])ar- value of hank stock nnieh less meanino- than the "he)ok value." The l)()e)k value (d the haid< stock re])resents the -$100 par \alue plus the ])ro]iortionate share of the surplus. The whole ])urpose' of i"e(|uirino' a certain capital sum to he eonlrihuted hy tlie' shareholdei's can !)e defeated hy the' suhseiiue'nt w ithdi'aw al ed' its fimds as loans to .shareholelers. It has fre'(juently happe'tied that hanks have heen started \\ilh e-apital horrowed i)\- the inee)r- XatioiKil ]\:n;'.. \<\. ]i. JH. iJANK s'i'.\ri;.Mi;.\r MAHii.riii:s 07-, porators, wlnCIi horrow inos liavc hecii repaid just as sium as the hank was in position to make h)ans to the sliareliolders. Ill the statement (pa^^es 201 -2) tlu- eapital stock of ;ill the national hanks amounts to a httle more than one I'ilhon (lolhirs. or to ahout one-sixth of the deposits. This means tliat there niiyht he a slu'inkaiie oC at least !'•' per cent in the assets of the l)anks het'ore the de- !l||^ito!s wouhl l)e in (hmacr. :i'2(\. riuJhidcd ym^//7.v. Tnh'ke tlie majority of iManui'aeturino- l»usinesses the profits of a hank are ear- 111(1 to the profit and loss aeeount as they aeerue eaeh 'l.iy. From the on.ss profits must i)e dethjeted all the ' Ajx-nses of doin.y- the husiness. At the end of the fiscal \«ar the directors nuet and declare dividends from this item, the effect of which is to transfer a part of it to the account of divide^ uijjaid and the halance t(» the sui|)his. Sometimes I dividends when pavahle are placed directly to the accounts of the shareholders when they hapj)en to he depositors as well. •'{27. XatioiKil hfiiil,' notes outsli, Unci. — This item rrpresents the amount of notes for which the hank is ^iill liahle. All the notes which the comptroller has ! M-warded to the hank are charoed a^i-ainst it until he lias received the notes hack a,««ain or has received lawful money for their redemption. If the Dank has any of 'iicsi' notes o;i hand they will he deducted. it will he noted that the amount of national hank notes oulstandin,L>- almost eipials the amount of Cnited Slates honds deposited in the Treasurv to secure circu- ■ I'lnn. At the particular time this report was made lie l)anks were puttino; out as much eireulation as nos- -ihle on their hond (le])osits on .aeeount of the very liio'h nite of interest at which thev could loan the funds. '^',6 .M()M:^ AM) I<.\NK1N(; 1^1;! 'I'lif ;mi()iini of Ixiiids to secure cifciilatiDn is cnnsid- crahlv ox ci- oiu'-liall' the capital stock ol' tlie coiiihiiied l)anks. sliowiiin' that the hanks were disposed to hold iiiorc hoiids than they wvvv I'lMpiirid to under tlu' law . '.V2H. Sidtc haiih' iK'tc.s oiitsldiidiiifi.- 'IMiis small item, which amounts to only s;{().()00, is a M'stiyc of the ("i\ il War period. Many oi' the state hanks of that time were conxcrted into national hanks. 'I'he cii-culation which they had outstandin^u' at that time could not he called in and -S'JO.OOO of it has ne\ci- heen presented lor redemp- tion. The items due other national hanks, state hanks. \v\i^\ companies, and ai)pr()ved ixserve agents represent the {lej)osits made hy othei' hanks. .'J2!). Iudhldu(d deposits. — This item represents the amount due to indix iiluals and corporations. Tin amount si!i ' ( M l! \' ! 1 ! >( Hi i ! If ' !'f 'f M !'! ! I • ; V : : •- •- r. ;•-::' ^ •'• - i " * / " * i ot" the certificate which is ne^otiahle. These deposits closely resemble savings dej)o^its except that they re})- HANK >1 A ri.MlN 1" l.I AlUl.l 1 1 1 .r KMiii a deposit in;i(ic at oiir tiiiu' instead of in install- iiiciils. 'I'lif cri'tificate of the hank is soiiKliines ^iNeii liy I he hank instead of a note, where fniids liave been iMii'i'ow't'd. ;{.'}(). I'liilfd Slates (JfjKisits (iiid dcjuisits of Viiiti'd Shitts (lishiirsin^ offivcrs. 'I'he (iovei'iinient deposits ^' cnred hy I)on(Is are (Hxided into two ehisses. Tlie first :> more perinaiKiit in eharaetei- and eonsists of fluids (iwned hy the (io\i'i-nineiit in excess of tlie (hshurse- iiients re(iuiiv(l. 'I'lie second eiass sii^nifies deposits uliieh ha\(' been made hy otHeei's of the (iovei'iinient t( iiiporaiily hut which \\ill soon be rcMjuired to make payments to (iovernment cre(Htors, .'{.'{]. lioiids /;o/vorc'<7/. There is no re(iuirement in !lie \alionai J?ank Act that the bonds deposited hy the I'jinks to secui'c circulation oi" dej)osits shall be owned Dutri^'ht by the bank. Some banks find it profitable !m borrow from investors oi- other financial institutions '\\v bonds recjuired t'or tlu' |)uri)oses mentioned. .So InwiT as the bori'owin;^' bank is sohent and the interest nil the bonds is paid I'c^ulai'ly to the real owners, the l.itter suirci- no disadvanta^^- whatever from having the Miids out of theii' ])ossession. .■{;{'_*. Xoh'.s- (Utd hills rcdiscouutcd. — This item, so in- ^i^H'uificant in amoimt, su^'^'ests the <4'i'eat dilt'ei'ence lictwcen Amei-ican and l''uropean bankini^'. In this ioimti-y it is considei'cd a confession of financial weak- ness if a bank seeks to rediscount any of the paper Ik Id by it. In Kuro])e, on the contrary, a Jar^e i)i'o- noi'tion of the paper ])urchased or discounted bv the i';iiik is ac(|uired with the exi)ectati()n of rediscoutitin^' I. This is a ureat advantaijc because it nlaees a!!V 'i.iiik in a position of bein^' able to loan to any amount, now in<4' that it can always replace the funds bv redis- ^J7^i AIUM:^ AM) HANKINi; ^'" c-oiiiitliiu' the notes. In thr Tnitc-d States, prior l<, 1<>I.'{. when any hank reaelied the hunt of its h)anni^' jjower. it was ohh^u'ed to i-el'nse aeeoniniodation to its enstoniers. no matter iiow |)ressinL>' their need oi' how (hsti'essin^ the eonse(inenees of denying them the I'nnds. The |)rae tiee of i'e(hseonnti!i;.i' ])raetieally amonnts to makin^i avaihdih' Tor thi' u hoh' eonimnnity the erecht of thr h)eal bank in the hii-ner monty mai-kets. The tanh'ness of Ameriean hankei-s to adoj)t llu ])i-aetiee ol' i-e(hseountinn with all its advanta<<{ ^ hoth In themselves and the eoni- mnnity. |)artienlaiiy to the eomnumity. is mneh more inexplieahle heeansr the disadxantaucs of {he sys- tem appear to he insi<.;niticant compared with its ad- van' ages. li'.iti. Hills jjfi//(ihlc.- This item, which is ahont six times as hirnc a- tiic precedii,- one. sinnifjcs that flu hanks June horrowcd oiitrii^ht tiie sum ii|)resenled in- stead ol" selhn<4- some of their resonrees. ii'.U. ('cr!i/!((I clitch.- 'I'his is an oivlinai'v check drawn i)y a depositor which has he( n ei ilified I)y th< cashier or othei- ap|)i'opi'iate oflicei' and which has not yet heeii presented for payment. When tin hank eerti fies a ehec 1- t^ r a mom it is t:ikiii from tin- aeeonnl of llu dcpositoi- and placed in the certilied cluck account. H\ this act i( hceonies a dii-ecl ohlioaiion of (Ir' Imnk tlu same as a |)roniissoiy note. If flu hank should fail liefnre it is presented lor ])ayment the holder woidd ha\(' no i-ci'onrse iipo.i tlic original di-awci- of the check. Tht fact that the holder chose to Iia\<' it certilied instead (d' d( rnaiuiiiiL!. pavnicnt .-it the h.'iiik llu-ons the risk of lion-paynient npon him. If ll,( maker of the check himself had it certilied his liahility for payment is the same as iii ijie case of an or(iinary check. Xi.~). ('(i.sliiti's chtiL.s niihlituiVtii:^. This item i-eprc- BANK STA'n.Ml'.M' LlAllILiTIES M Ills the checks whicli the cashier lias signed on hehalf (if the hank against (le|)()sits in other hanks or checks ii[)(iii the hank itself. New Vork exchange is the name i^iMii to cashiei's cheeks which are payahle at New ^ iirk hanks and which aii; sold hy hanks throughout the (duiitry to persons wishing to make remittances. f : . CHAl'TKH XIX OH(.AM/ATI()\ WD U( SIM.SS OF Tin- R.WK .•J'}*!. \t ot a 10 pel- cent pel- aimum tax. which is so jiiwh as to he ahso- lutely oro|iihiti\e and in conseniiencc the state hanks issiK no paper cin-iency. .'{.'{S, ri/\ S8() UllGAMZAriON AM) HISIM'.SS L>.M •if the firm to the extent of his private I'ortiine. The Diilv ])rivate hanks oi' any eoiisiderahlt- si/e are those ikaHn^- in foreign (.■xehan\s the otlieers of the i-or- |)(iration issuin^' them aie usually not (lualitied to mar- ls( t a vcrv lari>e issue, a speeialist in that line is in demand, 'i'he underwriter agrees to sell the entire issue at a certain fixed price: sometimes he uels a eoiuniission liiit more often he relies for his proiil on sellin<4' the s(cin'ities aho\e the agreed priei'. If an issue is larger than his own firm can handle he may or,uaiii/e a syndi- cate, with himself as syndicate mana'e pro])ortion .-»'■■ writiiin- syndic-iites had failed to sell to the public and had to carry tlu'iiist'lvcs on uiarnin at their haidvers. ;34(). Tni.st companies. A tnist comnaiiv was ori«i- III » • ^ iially not a l)aid< at all hut a company incorj)orated t(j execute trusts in the le^al sense. TIr- lar^e powers granted to these corporations were. sonieh"ines ■'inad- vertently." found to include the powci's necessary to do a hankiny- business without many of the limitations of state i)anks. In the last twenty years there has been an enormous n-routh of this type of instiUition, and it has become a \ery serious competitor of both ?iatioiial and state baidj; dc pari Die lit.- The trust company has two distinct departments, the bank dei)artmeiit and the trust department, with sets of oUict-rs. The bank- ino- dej)artment is con(]i..ie<' almost the same as a com- mei'cial bank, althou^yh the conditions and laws in the diffei-ent localities have forced it to take on a (hft'erent ioi'iu to suit the circumstances. In \e\v ^'ork C'itv. for e.\ami)le. the trust companies ha\ e specialized lart^elv in the collateral loan business. Tntil recentiv the trust companies in .\(\\ \'()i'k C'it\ were not re(|uire(l to keep any rcscrxc. Instead of l)lacin,ii' money in their own \aults. therefoi'e. thev either (kposiled in nalion;il banks, receiving; thereon a small I'ate of interest, oi- loaned if for .lock e\c!iani;c purposes at call loan latis. These loans could i>e converted into cash at such slioi t notice under ordinary circumstances that the trust companies telt it unnecessary to keej) anv other reserve. When the volume of this business reached ( iiornious proportions the national and state banks felt that they wen' jorced to have on hand readv monev suiiiiieni io provide for auy su(i(jcn deman.,\ not only at then' own counters bu' at the counters of {)!{(. AM/ATIOV AN!) HrsINKSh »^ff-^i i!I tile trust coinpaiiics as well. Tlicy IVarrd that in I line of ^viu'i'al panic the small pt'i-ccntayc ol cash rchi- li\i to the (Icniand (lc])<)sits of hoth hanks and trnst 1 iiiiipaniis wnnld ])rcci])itatc a disastci-. .\t this time lli( trust c(impani;s wvvv mcmhci's ol' the clcai-in'^' h(»iisc ;i!iil in orcK'i' to t'oi'cc the ti'ust enm])anies to Ui'cp I'e- Mi\is a I'ide was passed in May ol' UMl i'e(|nii'in!^' trnst rMiiij)anies to keep a reser\ i' of ].') per cent in cash and III |ier cent in deposits in meml)ei' hanks. .Manv trust loiiipanies were at first unwilhnu' to comply witli this |iid\ ision and withdrew from the eleai'ino- house. He- liiic till' end of I'Jll, ho\\(.\ei'. the leadinu' tiMist com- panies chan' the trust companies to keej) a resei'xc of i ") pel' cent. ."UU. I)( {losits (if Inist com pdv'ics. Tn a ureat many iMcalities the trust (ompany has de\elo|)ed an en'.irely Ml \\ field iiithei'to ne,t>leet(,(l hy thi' hanks. Hy advci'- tiMMU and other nuans they ha\(.' attracted larn'e imm- I" 1^ of personal accounts o! pi-oplc who had n< \ir iNriiit thoiiuhl of ha\ iti f'i. / / ^.^( lii ji'ii'i III ( li f . i iiC TiiiSi ir j ),i ii iiiCnt ()I lilt tiiist conipaiiN has no hankinu function whatever, If , = tt X4i *.. . » ! I Ui m '2S |. MOM.N' WD H.\\KI\(, i"'inj)aiiy iiia\- act a^ rcyisti'ar I'or coi'porat ' )iis, aiitliciiticat iiiy llic issues ol' stocks and lioiids in ordci" to prevent an '!\ ci'-issui'. It tr((|ueutly acts as ti-aiisfer ayent i'oi" ; "i])()i-af ions it' it is located in a central city. In the i->e of failures a trust c()ni]);uiy sonietiiiies acts as I'c- ciiver under the direction of the court. All these fiuic- linns arc of niod( rn ilc \ tlo])nient l)ut so nci'cssary have tli( y ticvoiue tliat it would iie almost inipo.ssible to di.s- |:i use w itii Iheni. .'iltJ. Sd'iin^^s Ixnihs. - A sa\in,us hank is really not a I'.ink at all. if the word is restricted in its use to institu- iiuiis \\liicli pro\ ide a niediuin of exchan^^e. A saxin^s j.iiik is more closely n lated to the iiivcstnient company. Its pui'posc is sim|)ly to recci\e funds in small amounts I'M- investment in sccui'itits or I'cal estate. The dei)osits nt not suhjccl to I'heck and the hank may cxtii n'ciuirc ihlity days' notice before niakini'- payment, t'onsi'- 'iiKiitly the savinn's bank is under no necessity for keep- 'iii; a rcsei'\e. ( )n tlie other hand, the sa\ii(,i>s bank li.is no credit which it can loati and receixe an incoim- •!|inii. The business ot' the savings bank is simi)licity itself. It simply L>athei's together small sums which "f themsehes are too small for inxestment and pur- iliases witli them inl( rtst-yicldin^' secui'ities or mort- Liay'cs. The} usually |)ay interest of 'i ])er cent or more ! > dcposiloi's. wh.ile the income iVom the in\ I'stmcnls is iisnallx' below .") per c( nl. In some states, like Massa- iliiiMtts and \ew N ork. w lit re the laws restrict wry closely tlu' securitiis in which the saxin^s ma, be in- vested, thus forciuL; the savinus \y.\\\\\ to buy onl\- first cias^ sei'Unilcs, iiie in;iii;in in i i i(|tiiiiii_\ ii.ss iii;iii i pti cent. The e\pi ns-.s of the business, however, are so small that ev ( n a I pi r c( nt margin is prolitablc. I t! 2S6 MCM.V AM) B.\\KI\(, Hcfikl 34.7. The <>r;u;(in'rjtth,,i of a J)anl,\~'V\w usual nutlio,] of or- company sells the stock to local capitalists and emi)Ioys the cai)ilal in estahlishinn- new hanks clsewhci'c. .'Uj:vn\\s the nierchant or farmei' may find that the loaning' business with all its details is becoming- niorc ini|)oitant than his renular occupation. People lia\e leai'ned to tiMist these men in their rc<,nilar hues of busin(ss and intrust to them for safe kcc|)inn' their sa\ in->s oi- \aluablcs. Tluy are also asked to take charge of istafes and are consulted with I'cfercncc !o iiiNestmcnts. etc. In the course of tini" these men find it necessai'y to ha\c sej)nratt' ollicis arran.urd for the convenient ti'aiisaetion of this financial !)usiness and jxr- iiaps to ha\c assistance in tluir bookkee|)ino-. This ma\ gradually develop into the pr!\at'> bank, or the si/e o! th( businiss max make it advisable to take other men into tlu' business. :u«t. \h.,ll>>.iJ- r. \ :,.,.,...,,,,,..,f. I I ,, ! ,1 stockholders are tlu ultimate authority. Their powci-. ho\\( \ er. is all ilc lei4at( d to a numbei' of dii-cctoi's. Onee ()R(1.\M/.\'II()N AM) msiNKSS !ST i^in to I year the sliarelioldcrs ol' tlic l)aiik have tlic r •Imosr (lii'cctors, after wliieli they are entirely powerless. t\eej)t ill cases of fraiui on the i)art f)f the directors, until time for a new election arri\ es. .'{,)(). Directors. — It is upon the directors that the A\hn|e rrspoiisihility ot' the hank falls. The National Hank Act makes certain re(|uiremeiits of directors which ;ii( set forth in the foUowiiitr st'ctions: I i ■1 ^ic. •")] t."). 'J'lu. .iff'aiis of lacli a^xx'iat ion sliall 1)(> niaiia^rcl In not I('-> than fi\f ilircchirN. who •>liall l)i' flcctrd l)v the sliaro- linldns at a iiK'rtino- to lie licld at any time Ix't'orc tin- a>s()i'iatioii I- aiithori/c'd liy the Conipl I'oilcr ot" t!ii' ('unxMU'v to coninuiu'e tliu l)iisini->> ot" hanking-, and afterward at ni('itin<;s to he hold (in >Ufh day in .January of each \vnv a> is >})vciHi'd tlur('t"or in !lif artick'> of association, 'llw (hri'ctors sliall hold ottico for one yiar. and until tliiir sUccT^sors arc L-kctcd and have (jualifiod. S( c. .")! 4(). livery dircctoi- must, (hirin^' his whole term of ser\- Ki. I)e ji eiti/en of iiu' I'nited States, and at least three-fourths it' till' directors nnrst haxc resided in !he statt'. territm'v or (li ti'ict in "hich the Jissociatiou is located for at least one vi'ar nnniediately pn cedinej their t'lection. ami nuist he residents therein duruij; tlieir continuance in office. l'.ver\' director must nun. in his own ri^ht. at least ten -.hares of the c.ij)ital stock of the a--sociati()n of which lie is a director, unlo- the capital of the hank shall not exceed ^!^."),()()(). in which ca^e he must o«ii in his own right at least five shares of such capital stock. An\' director who ceases to he tlie owner of the refjulred lunnher of shavis of ''>e -.tock, or who heconies in any other manner dis- i|iiali(ii (1. -hall thereby vacate his place. Sec. .)1 i-7. l".a<'h (hreclor. when appointid or elected. >hall t.ake an oatii that he will, so far as the (iut\ devohcs on him. diliirentiy and homslly administer the .atralr- of such assnciatimi. 1 iti(|. anv of the provisions ot" this title, and that he is the owner m good t'aith. and in his own rijiht, ot" the numher of sh.ire- of JSS .M()M,\ an;) hankim. i«i w slock •■((|iiir((l h_v \\\\> title, viil)>cril)((i In liim. or ^tamliiifr In lii^ n;niir on tin hooks of this a»ociatloii. and that tin -aiiir i> not li\ {lotlifcatid or 111 aiiv wav plcdj^-cd a^ >ccurltv for aiiv loan or crlhc(i h_v the director making- It. and foi-tlficd l)v the oHicer het'ore whom It l> taken, sliall he liuniedi atclv tran>inltted to the ( omptroller of tlie Currencv. and shall be filed and pre^ei-vcd In h|^ otiice. Sec. .■)f^;j!). And in ca-e> of Mich violation e\er_v ^eiited to the sanie >hall he held iiahle in ln> pei'-onal and Individual capacitv for all dania^o which the association, it^ >harelioiders, or any other |)er.-on >iiall have mis- taiiicd in con^((iuence of such violation. Sec. .").'2;5!). If the directors of any national i)aiiklno- a->>ocia^ tion >hall know ln;;l\- violate, or knowinolv permit aiiv of the officers, a^cnt-. or >ervants of the a-^ociat Ion to violate. an\ of the pro\i>ion< of thl> title. ;dl the ri<^'ht>. privileo-es. and franchix > of the association >hall he tlierehv fort'eited. Such violation >hall. however, he di teriuined and adjiid^cd l)v a proper circuit, district, oi- territorial court of the I'nited States, in a suit hroii^iit for that purpose hv the ('oiiij)troller of tiie Cur rcncy. In his own name, Ijcfore tlic association >hal] be declared (iis>olve(l. Ill recent years the responsibility of the directors f)f' l)finks lias heconie an iinpoi'tant (luestion. With the increase in the si/.e and the complexity of the hnsiness of a hank it has heconie more ditlienlt to o'ct business men to ser\e on the directory who are willing to con- sent to contribute enough of their time to ^ct fidh' and thoi'ouohjy familiar with the business of the bank. It has never \)vv\\ customary to ])ay salaries to directors and llic smnii fee of '^') to -S-JO pei' meetino- js not sutJi- cient ti) .justify busy men in Ki\ inn- up much of theii- time. .'}.)1. ('onsidtrdlioiis /,»7>r<7v////4' cJ/oicc of directors. ''he eicdit (if tlic bank and its atti-acti\ eness to depos- ()K(iAMZA riON AM) lU SINKSS l)V( S!) ituvs (Iri)eii(l ill IK) siii;ill incasiirc upon the rc'])ntation "I the iiR'ii on the hoard ol" directors, and hence it has lieeonie the custom to select men for that position whose names are hkely to [)rove a husiness asset, not only aiiion^r the business men of their particular line I)ut with the n-errcral public. Jn iiiost cases these men are not familiar even with the rudiments of bankin-^- au'l in many eases rarely attend the meetings of the board. I'lider these circumstances it has been comparatively .asy for dishonest otlicials to use the funds of the bank in their cnvn private interests and this bas often resulted ill the ruin of the bank. In an address before the Penn- sylvania Bankers' Association in Philadelphia in IDOd, Mr. William }i. Uidnely, at that time Comptroller of the Currency, made the followitm- radical statement: T~, .MTjit from vc ry nu'c ami ixccptioiial causes, such as suddfii |ianir> or lUiis (luc> to fal-L' niniors, tlicre is iiewr aiiv rua^oti- mI)!c' excuse for the failure of a l>ank or \y\\^\: company. It is almost always the result of iuexcusahle folly auil itieompc tciice IT (lishoiiisty and fraud, and often ilw.' to all tlu-i eoiiihined. ll'/(<7/ (I })(ink (Iocs fail, it is flic i'milt i!)ility of i)ank managenniit rests u])on the (iirectoiN and they are to blame. Jn many cases the federal courts liavc declared that a director's duty is not !liscbar'''ed b\- merei\- electin<>' iithcers of ^-ood rej)niation, ability and integrity to nian- a<.>e a bank and then leavin^r its business in their hands, 'i'he board of directors, the courts have held, is bound I'l maintain a su|)ervision of the affairs of its associa- tion, and to have a ^>'eneral knowledge of the character iu' its M I .-) 1 I IV .'P.S < iiiii liiC jri.UiiKi' iil V\"iiiCi"i it iS voiitiueleu. M(l to know at least upon what security its larger lines 'i' c'redit ai'c given. I, 190 .M()M;y AM) IJANKINC! ;j.VJ. //r/>^'-.s t'. Spauldin^. — The riiited States Sii- pi-fiiie Court decision most in point is the case of Hri<4<,''s V. Spauhhng, whicli was a suit hroufj'ht by the receiver of the First National liank of Hufralo against the de- fendants as directors for failure to perforin fai+h^'uily and diiio-ently the duties of their ofhees. It was alleged that they had failed to call and hold nieetinnns. to ap[)oint any eoinniittee of examination, to reijuire bonds, or I) make personal examination into the conduct and man- agement of the affairs of the bank. l)ut that instead ijiey allowed the executive officers to manage it without super- vision. In rendering its decision the court said: \\ ithout ruviiwiiiu- tliu various (iccisions on tliu siihjeot. we liold that directors must exercise ordinary care and prudence in the administration of tlie aH'air> of the hank, and that this in- cludis Noniethin rii.u ntJ\if'*rs iii.i\ euuinic iiit' iiiuiii'ia't'iJicnt (m 1 Brijrgs v. Si)aiil(Iinfr. Ill V. .S. 13^. OIUiAM/ATlON AM) MISIMISS Su- je9i I '1^' '-puMliun. of f|„. hanlv Im a tni>tr,i n|firia|. ,,,ul tlim ivpoM' "i""i II"''- vnutuUuvr i„ 1,1, n-ht <'nn(l.u'( «,tl,„„t ni;.kii,u- ..x- ■niii-iati,,.!, tl„.|ii..|\r>. nr ivlvin- „|HUi lil> aiiMNrrs to nf tlu. afn.lr, „f '''■' ''■■'"''■■ ''"'"' i''''-' i- !i"l to !)>• t()lrr,-.|.,l that tl,, v s.rw as I'l.T.lv -iMr.l nniaiMcriK (,f i|,r in>l it , if i,,;,. fo chiiancc its al- l|-.u'tiv..Mr». ,„• tliaf fluir r, put;, linn. .|h,„1,| 1,.. „.,■,! ■,> a linv '" ''"^^"""■'■'- • ■ • II i- i""MiiM.t,iit ritli III,. purp..M.> and rliVv offli,. Ha.ikin- Art that iU vital i,,t,.n>t> .inaJ.I in- rcai- !iiitl.d to one man. uithont ovn-siuht and coiitroj.- :{.).'{. I^iioniucc IK, r,rr//.sr. J)irc(t(.rs iii;iy not cx- ciisr tlicmst'lvrs iVom liability on tlic plra" of i^'no- r;i!ic-e. Allliouu], it is a physical iinpossil)iJitv''ror 'nnctors to liavc iK'r.s..iial kiiowlcdoc „f tlic condition "I' the hooks and funds of a very iaroc bank, yet it is pKssihle and even imperative for them to emplov puhlie ■'••'•"iintants to make andits of the affairs of tjie hank iixlependent of the federal or state examinations. ;{.U. Sii/)j)lc'nu)/tar// (WaniinafioNs //(rc.v,sY//7/.~-The t;i'l that the National Hank Act re(|uires a fre(|uent ex- animatiw,, ,,/ the hank hy re<.niarly ap[)ointed examiners 1^ not sntheient. These examinations art' neeess, rily i'"'^nij)lete heeanse of the limitations ])laeed upon the I vaniiner. l/nder the older methods of doinu- the hank- iiii^' iuislncss no loan M-as o-ranted until the directors had s|)criHcall>' authorized it. Applications for loans wore '•""ided in an offerino' hook which was placed before llic hoard at ev^ry meetinn-. and no loans were o-ranted until the formal consent was ^'iven. This method is too ^lt) h MONKV AM) HANKING (lirci't())'s that tlu'v be I'amiliai- with every loan which may Ix'coine (hui^erous to the haiik. I\\|)erience lias shown that lar^e losses ha\e o'.eurred only where the directors have allowed the law to he violated bv loaniu''' iiior( than 10 pei' cent of the capital to one ])erson or corpoi'ation. 1 'in'tlK rnioie, e\ery loan made to a direc- tor or otlicei" ol' the hank should he carel'nlly considered ill the hoaid meetings. I f e\ t-ry director wei'e familiar with these two ty))es of loans and exercised his l)est ,judiiinent in passing' ii])oti them there would he feu- lossi's from thestsou. -es. Moreovtr. it would he impos- sihlr to deceive the directors reyai'din^' such loans he- cauM an ir.dependent auditoi- instructed to report s|)ecially upon this point could not fail to discover any ii'rei4idarities. .■{.")."). Ojiiii/Dii of Compl'-'^Ucr li'ul^chi. — On this point Mr. Hidnely sp'-'iiks as follows: Ali()\c ail. till' (lirc(l(..s of a l)aiik --lioiild ino-t closely scru- tiiiizr tlir liiaii^ to iitliccrs and otfiir director^, and >t'i' tliat tin v arc kcjil down lo not onlv lc;^al \\\\\ safe amounts. l"ar tlic uii)>l I'rctjiunt cau-i- of haidv trouhlc^. in fact, tin- alnio'^t iiivariahlc cause of janlx i'adnrcs. is tlic <;rantinj^ of credits fai' hi sonil tlic lc;;al and |iiiidcnt limits to the officers in- to one I'onci rii tir j;rou|) ot allied concci'ti'^. ^i lu iail\ owned a; 'luiia^ed Iiv the officers or dii( ciors of" the hank, or in winch tliey have diri'ctlv or indirectly, some li;r^c })i'Ciiniary interest. Wlien a l)ank is in anvtliiii^ approaching this (•(iiiditioii, it is in grave dangir, for its entire safctv di pi luls on the surccss of oiit-idr t nil I'prises, and tin man who should |)rf)tect the bunk has, perhajjs, a greater interest in protecting tlic other con- cern. It is j)rohal)Iv the most coninion, serious dereliction of duty on the part of" directois to allow such a condition as this to gradud t' 'U in a i)anls. It may sometimes lir done honestly ns the ! f of hau judgment only, l)ut in my i \pi rienco it \* the most r iiei; ctiusc of dishonesty niiii tiiud amonjj ban!-. I ORGANIZATION AM) HISINl.SS ^9!J I officers. I (Id not n'lnciiibLr a case wIiltc a liank dtiiicr iiad the moral courage to let loans of this kind lanv down his hank «i'hoiit rooi'tiiig- to crliius of -onu' kind to conceal or ])i)->t pone the catastrophe, in hopi ■- that ^dme t'ortiinde ciri'uni^tance nii^^iit inter-'eiic to save hini and I'oni'eal hi^ fraud. 'Ihi- fimctioti ol' the honi'd of diivctors is lo assimu' the responsibility t'i)r the safety ol' thr \nink and io (kdci-- miiif the o'eiicral policies which shall lie pni-sncd. With the active conduct of the business it has nothino- to do. This function is delc'^'atcd to tlie otlicii's, the cliirf of whom is the |)resident. .'{.)(). TJic j)rcsi(lii!l. The president is alwiys the |)re- sidino- ofHcer ol' the hoai'd of directors, it devolve.s ii|)(»ii him to see that the directions of liie hoai'd are carried out. In some cases, espeeiall\ where there is a this !uinii!\- hoard ol direetoi's. the president exercises the whole power. In other cases he sim|)ly carries out the ' ill of the board in tlu' administrati\ e details without iiav ino' even th(> authority to o-rmd a loan. I'sually the powers and dutit's of the president lie somewhere be- tween these two extremes. The boai'd as a rule deter- mines the maximum limits to which credit may be cxlcndi'd to |!articular (iiiiis, and leaves tlu |)r« sidcid wide discretion in orantino- credits between these liimts. Ill lai"o(' banks tliei'e are \ iee-pri'sidcrds who share .^ dii the presideni the didy of ne^'otiatino- with itonouers. ;{.')7. Tlir cdsliicr. The cashier of the baid< is its chi(d' .'Xicutixc otlieei-. u|)ou whom falls the duty of opei'atin;^ the bauK, He has direct <'harL>f td' all the employes and must of I'otn-se be familiar with the details of every •Icpartmeid. He usually acts as si'ci( tary ot' the boanl ■if (hri'ciors. it is ins duty io prepare iiie reports and 'I'tmeuts. Ml is llw ullicer ( inpowei'cd to si^ii doeu- ■idi MONEY AM) HANK IN (1 iiK'i'ts Oil heliair of tlie hank. His sif^iiature must alnays a])])eai- 111)011 tlic eirciilatino notes issued or the checks and (h'al'ts dcawii hy the hank u])( its corre- spondents. In most lianks which ha\c not yet developed a s|)eeial crechl d'|);n'tnien! the cashier is the ehiel' credit ofheer. \\ hilf th( president or \ice-presidenl usually ivtaiiis the autlmrity to yiant loans, he usually depends upon the cashiei' for inrormatioii as to the cre(ht responsihiiity n\' tin a|)i)lieant. In those hanks where the list of hor- rowci's has heconu' extended and where the adxantan'c of a credit hiirea.u is recooni/ed. the cashici- iVcijuently has an assistant who has sj)eciali/,e(l in this field and who understands how to accumulate and systeinati/e informa- tion aH'ectin>4' the financial status of the [)atrons of the hank. The ei( (lit departnieiit of a hank i)ioh;ih!y oi!'ers more opportunil) for an employe to ac(|uaint himself with the science of hanking in general than any other depart- luent. The husiuess of a hank is of such a routine char- ac-ler that the emj)loyes ha\e \ery little op|)ortunity to learn tlie husiness from the inside, or to tiispla\ initiative. or to perform duties re(|uirinjjf discretion. ! nlike most husinesses tlii're is no line of jiositions which i-e(iuii( successively more and inoi( husines.s sagacity on the part of Ihe ocdijiant. The ^ulf hetween tin highest em- ploye and tilt ollieer is a wide one and very dillicult to cross; in most lar^e city hanks it is |)raetically inipossihle to cross, and tin- oHieers are usually reciuittd from small institutions where the emnlo\ e has had an oi>noitiunf\ to learn all departments of the hank. .•J.>H. P(it/in(/ teller. — i\ii imj)ortant (mplo\e of IIk hank is I he payin;.* Uiler. in ii.is charge of all iii( (lut- g'oing I'lnuls o|' the li.inlv. The transaclions which UKGAM/Al'loN AM) lUJSiNESS 295 a(iuire the paying out of cash are: (1) Cashing- of clieeks presented at the bank; (2) payment of debit bal- ances to the clearing- house; (3) shipment of euiicncy to correspondent banks. It is the (hity of the jKiyinir teller to see that all the cash of tlu- bank is ])roperly accounted for. It is necessary that he be familiar with flic siuiiatures of all the (ki)osilors so that he may make iiu payments without havin<>- pro])er vouchers to show !.ii them. Hanks are under legal rcspdn^ibility to de- positors to pay out no funds on tluir account excei)t t • the proper payees or their order. Kven if the signa- ture on the check is genuine, still the jjcrson demanding pavment may not have ])roper title to the check or he may have altered it. It is. therefore, the duty of the Idler to safeguard the bank by re(iuiring proi)er en- dorsement before tlie cluck is paid, so that m case the depositor attemjjts to repudiate 'in ■heck the bank can ;ill upon the payee for ih mibnrsemeid. :$.•)«>. Jiecciviii;^- tclltr. — The employe second In im- portance is the receiving teller. I'nless there is a note cl.ik in the baid< it is tl. duty of the i(cei\ing teller to lake in and account for all the funds which come into the bank. His chief duty is to receive cash, checks, (hafts, and other items, and to give credit to dei)ositors tnr the same. His principal duty is to assure hiniM-lf that everv item for which credit is given is collectible. Funds comi' into the bank from { 1 ) depositors. (2) credit balance s at the clearing house, {li} i)ayments on maturing j)aper held by the bank either as an asset or for collection, and ( t) currency shipiped by correspond- ent banks or by the Treasury of the rniled .States. ;j«)(). Xolc Itllcr. Where the business of a l>ank is extensive iitongh to re(|uirc it. there is a note teiier whose function if is to make all the collections. Matur- .'.'i)(i -MONKV AM) HANKING 4- ino- notes payable at the hank art 'w his chai-f^e. He !-ecei\t s all eas mittaiices from lail-ol'-towii eiist oiners. He lias (lirec liaroe of all the eojlectioiis of drafts, etc., ill the city, except the checks on clearin<>- house hanks, wlileh are usually attended to hy the clearing house eJei'k. ;3()1. Di.scn/nil chrlc. — The discount clerk has charge of all the loans and discounts of the hank after they have been negotiated hy the ollieers. It is his duty to keep the documents so systematically that there will he proper presentation made of them when they matiu'e. When due the interest is cali'ulated and the noti' turned over lo the note teller foi- collection. He has charov of all till' collateral held to secure loans unless the bus- iness is so large as to r(i|nii'( a en||atei\d loan cierk. In l»ardlat( tneiit show in. > the ^•""•hiinii of III, hank and all statements re<|uin ,1 b_\ the OlUiANIZATION AM) 1USIM:sS 297 , iiiii|)ti'nlk'r of the ciirreiicy. 'V\\v Imlk ol' thr book- Lii [)iii^- work falls upon tlic iiulividiial ledo-ep keepers, whose duty It is to chai'^c to the depositoi's' aeeouiits e\erv cheek di'auii hy the hittei' and to credit their ac- counts with all the deposits reported hy the receiving teller. The bookkeeper must keep the paying teller iiifoniud as to the lialances of depositors. In many hanks there is a separate dej)ai'tme''t for liandling eorrespondei\ce and the collection of out-of- Imwii items. It has hecome the custom of late years for II iiiittances to he made in checks on local ])anks rather than in \e\v ^'ol•k exchange oi- tnoncy orders as for- Dicrly. In some cities the hanks ai'c so anxious to secure tilt (kposit accounts of lai'ge firms thai they make no charge for the collection of local checks, although this may re(|uii'e con'cspondenec with a multitude (d' banks in all ])arts of the I 'nited States. .'$•!.'{. Lii:cs rt'ldliii^' to collections. — Kvery (le|)osit in a hank other than cash must be collected. If the item N ;i chfcU on the bank itsell' oi- a matured note payable :i! tlie hank, it is paid as soon as the baid< gi\es ci'cdit to iiic depositor. Hut if the items ate payable hy another paity the bank is usually c-onsidered, in the absence of a special agreement and when the items are endorsed in lilank Ol in full, to be the bailei' of the di j)ositor. The deposit is in fact a special deposit until the proceeds i' the I'ollection aic lodged in the bank and credited to the ,t ha.l taken a certified or even an uncertif .d duck winch .. presented to the drawee hank without delav and the takn.o- ..f which cause.l no loss to the owner of th, collcctH.n iten, hy reason of release of endorsers etc ;, I-"""''-payn.ent of the cheek taken in pavnient of til.' eollcctiou iteni the hank should recover the item if P-SH .c- the san.e day an ••' ^^'••■'"^■^■•- ^^itl' whom it ha'l that the cheek had heen lost in the '"•"' alt,t ami sold it loan iunoe.nt pa.'ty who sent '- ■''- * ■- - --- \ ink i-..i,k for eoiieetinn-. i),^ {j.,,^. ,,.^.„^,,. U 4.. »!... \- ^^ ORGANIZATION' AND BUSINESS 0( )9 recovered from the hank, w hicli was uiiahle to locate the ])( i.soii to wlioin it had paid the j)rocee(ls. Hut a (h-a\vec hank caiiiiot collect the proceeds of a raised check i'roiii a collecting hank if they have heen paid over hy it to the owiRr of the item. .'}(U. Liahilit// of col lectin^- hanJx. — When a hank .in- (Idiakes to collect, it makes itself liahle Tor all losses caused by its neglitifenee, hut it is not res])onsihle for \]\v iie<'l!''ence of a notary selected hv it with ordinary care because the notary is a public (Mlicer. The law varies in the different states as to the liability of a collecting bank for banks to whom it sends the item in course of collection. In the federal courts, and in l'( imsylvania. \ew York, Xew Jersey, Ohio, Indiana, Michigan, Montana, and Minnesota, it is held that a collecting ]):uik is Jxiilcc and liable for the agents it se- lects to make the collection. In the otiier states, the l)aiik is held to be the (i^cnt and renders itself liable i'or sub-agents aj)|)ointed by it only to the extent of using (Ilk- care in selecting them; be\ ond this the sub-agents ;i!( responsible to the owner and may be sued by him. It is held to be negligence for a collei'ting bank to remit tlif item directly to the drawee bank, since that bank may in ^'e an adverse interest. Hanks do not succeed in avoiding resj)onsibility by printing in the i)ass books notices that they will not be liable for the acts of l)anks to whom they send items. Such contracts have been held to 1)e void hy the courts on the same j)rinclple that railroads cannot avoid lia- bility for accidents to i)ersons riding on j)asses even though the pass bears on Its face such a disclaimer. 1 '■ a note is payable at a bank and funds arc kept to pay it, the bank is the agi'ut of the nuiker and if the -Vi^ 300 MONKV AM) UASKISG I! l.a,,k I'.il, l,,f„,r IIk. h„i,lc,- „r (1,0 „nt, J,,,,, ,,„„„,■„, ajr»aiii. cove,- t M • , "'' •■""' "'^ ''"""' '"'"k 'I- emus l,.,l ,t has pa„l i,v n istak.. fiore hci,,^, „„ f,„„,, tl.e colfcctu.K l-ank is safe :■., ,-ct„„,i„j, .i'. ,„, , i' and recen-n.^. „„ck tl,e check. The c„d,„.se,/a K-leasc cvc, „ ,„., „ , „.,.,^,, „^ ^,_^ ^.,^^_,,^ .^ . ^^ - • The n kc- appcarc, ,„„I sai.l he ha.l ,„a,le an-a„Ke. i"U,ts /,„■ ,ts ,,.„ewak The cashic,-, h.nvcvc,-, hisisLi recenei „sln„.|,„„s to ret,,,-,, the „„te. lie se„( the >roeee,ls M.stea.k Me >v„„l.l „„t have hce„ i„s ie,l Z2z!:::i::;:r '''"''-' --'^"'^''-'^''^^'^ -M:, Clhrii,,,, of o„t-of-f„!,„ rf«V.-,,-The collec- tion of o„t-of-to„.„ i,e„,s is pe,.l,aps „„e of the ,e n t r:,-?,, ;""""■. '"-'-•■" ™i-ia.e,Mti! eo.sl ol eolh.ct,„^. an ,tc,„ averages ahout ei„htee„ c-nts ; -:'" as ,„||o„.s: Exchange ,., cent, ^os e ,d •I -Heefon «... Small l,„„k.s shift the txpe,,. o the h„«e,. hanks hy keeping a-vounts with I, a„.l 'lq««,t,„«. all ,.„„,,,;„„ i|,,„s. ].a,..e .,„. ha,,,;;!' ;"!"■'■ ^"" '''I'"-'"- '" l<"P I'alances which th,.- :;,,.,,. .a e a,e lar«e c„o„j,h to yid.I a piv.fit over anil ahove the expense ol niakinf. the cilleclions sv'!u",',;or""T,'''r "'"'■'' """''' '■""" "''"'-'>• >■•■""< » ■ ' ' '", '■"'""•'" ' ""■>• H,eeks i, „, sue anncr as u collcct.,1 Ihn.ujfh the cic-,ri„„ ;..;.-, ,i> w i i,^^.,, ;i(i,)j)ti.,i. It was pru,,„.,..| „, H,„,,„ „,^„ ,„,^, ,^^^^^, ^j^^ ^^^^ ^^^^ ORGANIZATION AND IH'SINESS 301 I {■(.llcctiii.t,^ for the city, tlius avoiditi^v a large omnimt (if (liiplicatioii of work and hoUlin.u- the country l)aiiks to stricter terms than conii)etiiig city banks could do iii(livi(hials. This was the Suflolk hank system, applied to check collections. The scheme failed mainly because the banks were unwilling to give any one bank .the ad- vantage which such a position would bring, nor to give ;my one bank the o[)portunity to learn so much about its affairs as the collection of its items would give it. To avoid these dilKculties it was projjosed to charter a new natiotial bank for the ])urpose. Init the law forbids national banks to hold stock in other }»anks. Schemes for dividing the country uj) into districts with a clearing house for each district are impracticable because settlements could not be made on the same day and it would be necessary for each member to keep funds on deposit in the clearing city to pay balances against them, rurthermore, the pro rata expense would he considerable whereas now the country l)anks pay nothing for getting their collections made while they get fees for collecting items on other banks in their vicinity or even on themselves. ;}(;(■>. l^iifflisJi iiiitJiod of couuinj coJIi'ctinns.—Vuach i'aiik in London receives during the day a large numl)er if ehecks upon country bankers. I'pnu these checks the name of the London agent is printed. K\ try clear- ing banker in London is the agent for one or more countrv banks. So when the country clerks of each bank get such checks from the cashiers, correspondence department and other som-ces. they proceed to arrange them lor clearing as they do town checks, sorting them and ])utting them in j)ackages according to the London ugencies at which they are payable. No cre(ht is given iii the clearing house for these country checks on the day 2. 11 .'502 •AIONEV AND "BANKING on wlnrh tl.ey are delivered. Tlie aniounts are sin.piv .settle:liO on the third day, and thev are simply ( educted from the total of the countrv cl/ecks on the day of settlement. *L.« ;«#"■ ■ T CIIAPTKU XX Di.l'OSITS AM) Dl.l'OSriwRS '.W7- General di po.siis. l)i'|)()sits are of tw^ kinds, -( iicral and special. Cieneral deposits are always moiuv (ir the ri^Iit to receive money. They ei-eate between the bank and the customer the rehitioii of debtoi- and creditor. The rclati(Mi is pecuhar in that tlie bank not iiiily contracts to pay the debt on demand (unless the deposit is a time deposit) but also agrees to pay to the order of the depositor any sums within the total amount dl' the deposit, and if it i'ails to do so it may l)e sued in damaii'es bv the depositor. The baid< mav satisfy the depositor by the payment of le'eneral iji riosit. but v(^sts. !!! ib.c r. 'i'he bank is ludd to i' -■■- ----- -- ' ' I --- --- use only ordinary care in protecting it and if it is stolen 303 304 MOSK\ AM) RANKING li^f Avitliout iicnlioviKT on [hv part of the l);ink, the owner imist hear the loss. Tlie hanker must return to the de- positor the ivleiitieal thino- deixisited. If the hank ac- cepts a eousideratiou I'or keepiiio' tlie deposit, it is held l)y law to exercise ^n-eater care. .'J(ii). Safct// deposit rowZ/.v.— IJecausc the banker was the oidy husiiiess man in the smaller j)laces, possessin!i his hank. Since the ^'row th of the custom of sending- local checks in making- small payments to city houses, such for exami)le as the one dollar subscription to magazines, the associated hanks in several of the larger cities have hi en compelled to estahlish a unilorm fee ('or collecting cwi-of-town checks, the rate usually heinif |'^- of 1 per cent, with a mininiuni diarize of 10 cents per cheek. (c) Safctif.—'Vhe bank relieves the depositor of the risk of caring for his money. (d) Loans. — The bank usually feels under obliya- til 111 to loan to a depositor on more advantaffcous terms and usually on less rif^id requirements than to non-depositors. It can do so because it is moie or less a((]naintcd with the affairs of the depositor and can accej)t personal credit when other parties would i-e(jiiire collateral security. The greatest advantage, however, (•->nies in times of panic when funds are needed most and when all the banks are refusing to loan to others than their dc])ositors. (e) Interest on balances. — Sometimes the })anks p.iy interest on the daily balances. This practice \sas 111 innovation of the trust companies and was due to the fact that the (le])osits in the banking department of the earlier trust com})anies were practically time de- posits. \Vhen the character (d' the deposits gradually Vii-jo •\m ■AOC) MCNKV AM) H.\M\l\(i i ii;'i 3", ?^ I). c'li;m^c(l the CMstdin still prevailed, imich to the vexation ol' the national hanks. (f) lucrcdsi's credit.- 'Vlic hankin^r coni^eetion f'l-e- (juently inereases the en (lit of the husiness man. A ^ood Imnkinn- reCerenee is Creijiiently ol' <^reat advantaii'c in husiness. and the l.>anks must he eonstantly on tlieii- ^nanl against persons who use their eonnectiiin with the hank to uain unmerited eredit. .'J71. Dillicultic.s ill cstahli.sliing a ncx hank. — It is very dilllenlt to estahlish a new liank in a communitv already sujjplied. If the old hanks are not willin/jf to aceoinmodate their eustomers freelv, and if thev chariie for making- eolleetions or refuse to loan exeept on oner- ous terms as to i-ate and security, a new institution nia\ attract many depositors hy superior inducements, pai- tieularly hy paying interest on deposits. Too man\ concessions, on the other hand, may cause the new hank to lose credit for soundness; it may he inclined to taki great risks in loaning in order to reco\er the amounts j)aid out as infei-est to depositois and in the expensi\e sei'vices performed for them. There usually is no dilli- culty in finding horrowtrs for tiie funds of the ru u hank; in e\ery community thire aic always husiness nn ii of unsound methods who ha\e hecii refused credit In the old hanks and who wilcotne the a|)pearancc of ;i new \nii\k. hoping to estal)lish relations with it. They try to place the hank under ohligations hy opcnitig di- posit accounts. 'A7'2. f'tiliic of (I hdiiJ.iii^' coiiiiiclioii. — Many well cs- lahlished hanks ari' eiiahled to hold thi'ir depositors w itli out paying interest on di])nsits against the competilioii ot' the trust companies hecause they offer the (lcp()sit(n- i)i;iM)si'i>^ AM) Di.i'osn ()i{s ;j()7 ii.iiiicly. credit in limr of need. When m panic comes Mri'l (\eii str()nl " hiliin/. ' To illustrati' the practice I< I Us assinnc that a sitor to check .-i^ainst the cr< dit even IIm'U^Ji IIk b.'uik wdl not i'eali/.( die proceeds of the check oi draft within nii'' or two weeks. It will riiiiiire at least a wvrk lor the cheek or dr.ift fct reach San I'lan- '•isco and be prcseiitid to the ennhderate lor pa\nient. 'irip.itino- the .irri\al of tin bMI auamst him the con- Icdcrate will provide credit at his bank by dej)ositin^ tl 'I'C a (ir.'ift or ebick on .1 liilnl <'< m !'< / 1< rO. iwiliiii.^- 308 MONEY AM) H.\NKI\(; h in New Oilcans. Thus Iwo oi- three {X'l'sons ?niiy have the use ol' eoiisiderahk sums ol' money lt)r some time without payment ol' inteiist. .'}7.). 7V//c /o (hjK)siU(l clicchs, etc. — Tlie title to paper deposited in a hank '.'ten heeomes an imi)ortant (pies- tion. It is a rule of law tliat it' the items de})osite(l in a hank arc for colleetion and not for credit on the re the National Hank of the Repuhlic. The lalttr sei/.ed the jjroceeds of the check after it had been (•('liK'ted in order to satisfy the debt due it. Dojjpelt surd il-c National Hank of tlie Kei)ublie lor the funds, ilaimin;^ that his own l)ank had accjuired no title to thi (luck. Heoardlcss of the agreement between hini- M If and his l)ank. Doppelt could not recovei- because the National Hank of the Uepublie had no notice, nor could it have leaiMied IVorn the endorsement of l)opi)elt's bank, that it was not the owner of the check. The law per- mitted the National Hank of the He|)ublic to regard IIh check as bein^v the j)roj)erty of Doppclt's bank. Ml. Acccpihi^ deposits xchcu insolvent is criminal. — - lie icceipt of deposits by an insolvent bank is clearly a Iraud and the ollicers who take (iei)osits are guilty nf eriininal oll'ense. ])unishable by inii)i'isonnient. In iMti\ icling an otlicei- of a bank of this cjiarge it is neces- ^al y io j)rovi' thai he knew the bank to be insolvent when lie rec( i\cd the d(|)osit. 'I'he InsoUtiicy of a bank is a \ery diflicult inattci' to deti'rniine sonictinies, l)ecause it li peiids upon tlu' \ahir ol' the loans and discounts in its assets. While the olliceis may know that sonic of '" lo.uis are not first class and !iia\ not be paid promptly \iii! r( sjio'isihiUt // aflrr riui- sdiKihlc tinw. The drawei- of a i-Ji. ck is always liable foi' tli<' ultimate payment in case tin liank should fail iielore it IS cashed. Iloutver, in ordi r to pniiect tiie drawer ol cheeks, tin a\\ reiiiiiii that a clieelv imis t be :nu .MOM'.V AM) IJANKINC; i' })rf.s«')ik-(l to tlif hank foi- j)iiymciit witliin a reasniialjlc time, othcTuisr tlir lioMrr of the duck must assume tin- lisk of the f'aihu-e of the hank. .•J7!K Local hdiihs. \u the ease of a loeal l)ank the courts liave held that a irasonahle time means until tin- close of the husiness day t'ollowino- the ddiveiy of the check. 11" the payee should endorse it to another party on the second day and the endorsee should hold it still an- other day hefore presenting- it. the hank iailino- in tlic meantime, the ori<>inal drawer would he released and the payee he eomixlled to reimhurse the jiolder or endorsee, hecause the lattir had jjresented it for })ayment within a reasonahle time after reeeivitin' it. In the ease of ehecks drawn on hanks outside the city in . hic-h the drawer resides, the cheek must he forwarded on its way hefore the close (d' the next husiness day in order to hold die drawei- responsihie. .'{HO. Hohhr of a clitch c(ui iiol .sue haul-. Tn nearly ever\ state a hank on which a check is di-awn is under no le;4al ohlioalion lo tin- holder to pay or accept it. win Ihei' the maker's funds ai-e sullicient for this. purpose or not. Of ronrsc if the hank has ;iceepte(l the check hy (■( ililicatioii. then I in holder has ;i claim against tin ''••'"'-• I I' ;i '•■■'Ilk should (hvlinc without a \aii.l rtasdn to j)ay a check dr.iwii on a siitlicic nt fund helon^in..' Id its de|)ositor the iiisl it iit ion would he liahle for wliate\tr injury the d( positor sustaiiie.l. 1 'or example, should a liaiik decliiK to |»ay ,i cluck sii|)])osiiio tli.it the makt'r's depMsil was iiisiillicicnt when in truth it was ample, the institution wl post-dated (litik before its due date i-aiinoi elnck tlie amount It 1, a^-ainst the drawer. In no ease can a eliei'k ] laiti ore -312 MONEY AND BANKING f'T 11. tnn. spenhec he c.|,a,...l to tlu- d.aue.-'s account. .iHo Srf-of.-^lhv rdation iHtuccM the har.k and () per cent dividend is paid to de- [Misitors. the failure is not so bad as this fi<,nn-e indicates, Inr a large number of depositors may also have been bor- ii'\\(rs and lunc lost little or nothing, :{H!>. Illustration.— A bank witii Sr^l, 000.000 loans and si,()()(M)()0 deposit liabilities fails. 1 f half the loans are iiffsft by deposits there remain .%')()0,000 of loans with \\!iieli to pay .%")00,000 deposits. Supi)ose the loans nali/.e M) pvv eeiit of their face value w hen licjuidated, < n- would then be .$2.50,000 to be distributed to depos- IC le (!' positors who itnis. or a ,•)() ptT ci.,,! di\ idcnd. I ( \^' If also borrowers had not been allowed to offset their (I Itligalions with their deposits, the assets collected would iuive been !i<7.') 0,000. which would have l)een distributed iitiiong all the depositors having claims of .$1,000,000; lliat is. each depositor would have received a 7.'> per cent ili\ i(l<-nil ,. 1., I....I as tl le percentage of divide nds indicates. •*''0. Form of note. — Some l)anks use a form of note HU -AIOM-.V AM) HANKINCJ similar to the f'ollouin^- in which the horrowcr specificailv agrees to permit the hank to transfer t(; itself in ease of his insolvency any deposit credit or other form of indehtedness: I'l V A N STO S , III .19. ""'■'■ '''''•■ ITDinist. to pay to fhf order of STAIK HANK OF KVAXSTOX, With interest at IHr';:,:;." ,,;; ani„;„. aft.r ;.•.■.■.•.• at tiTX of sa„l H,..„k, X ,1m.. n....iv...l. I„ ....s,. of the insolvency of the >m.le,s,p„..l any In.leMedne.s due fron, the lejral hol.ler hereof to tl"' M.ulerMfrn,.iment borrowers pai-ties who borrow to invest the funds of the bank in certain secvnities or property which they Mish to carry with a view of reselling at a profit, or of holding until I'liiids can be accumulated to i)ay for the purchase, or iif enabling the holder to gain certain control or infiu- I iKT. or of otherwise accomi)lishing some object external to the transaction. Such are the loans ordinarily granted brokers, investment bankers, and market opera- tors, lliese loans can be readily irali/rd upon m piw- [)ortion to the coincrtibility or salaltility of the collateral; 316 m MONKV AM) liASKlSC. It it utt L*-* tlKit ,.s to say. uudvv normal conditions such a borrower ^^ 'II pay ns loan at one hank by ..||in«- the seenrl^ies pledged there or by borro\vin<.. t'rom another bank -'m. Cuu'litinns under tchlch the,, arc fraud hnukin->- /o...--Loans oi' this eharaeter, if they are obli^atio,;; of aetive and capable n.en, and especially if pavabl. on clenumd and secure.l by well-,hstribute';"nr,i.s of rr-.lis.-ont.ts .•..•<■ .•,,,! to .rn.ain on cmlit "'fl' "'^' l»",l,no- hank in n.nd, lar.vr proportion than arc the proc-nls of or.hnary loans. A hank usualiv I'orrous to unrvnsv its rosc-r\es: a firm usualiv horrows to pay out the proceeds. rUv ahovc- mentioned two classes are considercl most (ic'siraolc loans: the two f'ollouinu. k,ss dcsirahk'. '•m. Capital /nans.-- -'I hinl, .-apital horroucrs. This Pin-ase is inlendcl to iri>onds secured b\- mortuaiic. Thi:, idea is eoi.e.sely exprcsseti by the advertisement ot ;i prominent Chicago bank: "C\.nservativ, bankln<^ Ujt LOANS or liu: i?.\.\k 11!) .oiisists ill caring' for many iiitciTsts, while (•a])itali/iii^f iioiK'.' Till' statciiK'iit of a sti'on<^ly or^aiii/.rd inaim- f;ictinMn<^' corporation or firm itidicatt's <|uicl'a<^e. To this class ])el(;n^ the li.ildeis of improved and j)roducti\e central real estate ill till' larger cities. Tiiou<4'h these loans command low rates by reason of the stable vahn of the security, na- ti i[ial banks are ])rohil)ited from takint*- them directly, except to secure a ilebt pre\ iously e\istin. the reports re,,uired of national hanks Comparison ,s ma.le with the statements eovev' I)eiiod of tti, vears: i-uii>- a LOANS OF THE HANK S21 .'JIM). Demand loans have i»ctrast(L— The first class irpresents the demand loans of all the national banks. It will he noted that these unsecured demand loans have increased over 4. per cent in ten years. The second class are demand loans secured by stocks and bonds as collateral. There is an increase projxjr- tionately in this form of loans between 1897 and ]!)()<;. The year IJKXJ was one of great speculation in the stock markets, and the increase in this item represents the ^n-owth of speculation on the margins. About one- third of these loans a'-e reported by the New ^^)rk banks aioiie. In 1897 these loans fell oH" proportionately to others. prob{iJ)ly ,„i account of the hcjuidatinn of' the stock markets which had taken place during the summer, the margin traders having l)cen sold out and their stocks going into the hands of holders who could purcliasc then, outrigh too. Donhlr-namc pa per. —The next item rei)resents trade i)aper discounted at the banks. The decrease of H per cent in ten years indicates the changing naturt' of l);ink loans. The commercial jjaper |)laeed through cninmercial pa|Kr houses, which are di scribed later, is single-name paper. It is now the custom of the largest Ik'iiscs not to take notes from their customers but to l'"in.w on their own credit. This tendency is more ap- I'li-e-if in the cities than in the coimtry as a whole. I'linnighont the country there lias luen ;"ui ab-.olutt iti- erease in two-name pap(>r of nearly 100 per cent, while "i«' increase n this class of loans held t,y \cn- York haiiks has !)• ^n not more than .'JO per <-eti». ••01. Single-name and brokers' paper.— 'Vhv amount ••'■ Mugh -name pap.r lu Id by tin banks almost tl. No. r)iip (Ml. I. \ rhU \I. NOTE % I'.V \ VSTOS, II I ON DFM ANI"), i\^\fr lintr pr'imitv to pnj/ to thf order nf Ihi STATI, HANK <)!• KNANSTON, nl >lt n/fire. ... Dot I *R', for value rerrired, vith inlirml of Ihv rote of p,r iml fur nnnum. nl'trr dotp. horynq dfjiofitnl irith noid fhink o> rnllnlrrol nrriinlii for thf imymi-nl 'if thm orul nriu of/iT Ivilnhtu nr linhilitii'n t>f Ibf uuilfi Bxyned to mid /{(ink hi'rituf'.rr or hrreoftfr ront lorl, il , thf folloiniKf pyoji- trty, riz. : thf markft ralu* of which m noir f If thf Honk or its attigni m : LOANS OF '^'HE BANK aa;3 ■ I, I'l Ihiil thai niiii if fit'id s(i-ur'ilii .iltall dirlinf i;i vnliir. nr the liobilitii of the uiider- M /(((>/ /') siiiil ISdiikx III- itn ainst the ,)ud^inent. This I'oriii of iiiilc enahles the hank to hecoir'e a pid/^iiient ert^htor in case the signer is threatined with insolvency and thus t(i |)laee itscll' iji a jjrel'erred position in collecting' the .M.t. K>.'{. Colldtrnil iinlc. '|'h( coliatei'a! note is the ordi- n.iiy noti rei|uiri(i of hoi rowers who pled/i^e collateral to SI cure the debt. It will he noted that the collateral deposited secures not oidy this deht hut an\' other (h ht that the si^iu r owes to Ihr hank. Tlu' hank has the n^ht •till i '11(11^ I tl I « tl I M I fnihue to deposit such collaleial makes the note due at :«+ MONKY AM) BANKINC; i m once. Tlie bank does not liavc to wait until the matur- ity of tlie note to proeeed aitini/.in^' the secui'ities as carefully as if they were purchasing" them. M)i. A'/.s/.' /// colhitcrdl h. ins. — A few years a^o a new stock ol' the Railway K(|uipuient Company apj)eare(! on the cuib market in New ^'ork. Heiuf^ jn the hands of the promoters of the company the stock was easily l)id up to a very hi^di price by means of "wash sales" that is, the promoters buying" and sellin<4' the stock an\on^' themselves. After the public had become accus tomed to seeing- the (luolations o!" f!ie stock in the daiK ncws-papv'rs ilie j)rnmoters wci ! to other cities an : opened deposit accounts with the banks. IIa\ in^ estaii lished their credit tluy persuaded the banks to a'-cept tin- stock as eollateral with a liberal margin. When the eon federates had l)()rrowed as much as thev could the bank- LOANS or Tin: uank 385 iiatiir- irther- ig the )lic or self if ! should n ohli- ICCOIIK' V seize • a new j)eare(l hands easilv lies" - stock aceus- V daily :s and ; estali- ■|)t tlll^ ;| lie coii- ' bank^ S), were one day surprised and chagrinetl to find that the piiee of the stock on the curb market had fallen to almost nothing and that the collateral, which was the (iidy secui'ity i'or the loan, was almost worthless. 'l"he great bulk oi' collateral loans in Wall Street are call or demand loans. Wiien the lender, usually a bank (ir tiiist company, calls the loan the borrower must pay it or his collateral is sold to satisfy the debt. The rates for call money depend upon demand and suj)ply. The yieatest market for it is the New ^'ork Stock Kxchange where it is offered by brokers just like a stock. When it is plentiful, call rates range from 1 to 3 })er cent, and money is easy; from (J to 8 j)er cent is firm, and when it soar beyond that rate money is stringent. In times of ))anic the rate has gone above 100 per cent. lO.) l\siiri/ lares. — Any rate of interest higher than that fixed by law is usurious. I low then can New \'ork hankers and money brokers charge 40 or 80 per cent foi- call money? Hefore explainijig how this is possible let us see just uliat is meant by the legal and maximum rates of inter- est as fixed by statute in most states. There is a very wide misconception of what is meant l)y the legal rate. Contrary to the usual impression it is not always the highest rate that can be charged for borrowed money. Instead, it is. for example, the rate that the court would iii,])ose if a judgment to collect an account "with inter- (st" wei'c entered. If the li gal rate in the state where 'lie judgiiirnt was entered hap|)ene(l to be ptr cent and 10 j)er cent ^i| respectively; in Indiana (! per cent is the legal rate and 8 per cent the niaxiniuin rate. 400. Call loans (■.r<';///;/(y/.— Althongh the niaxiniuin rate in \e\v \-(,rk State is per cent, the ^Vall Street liankers can charge any rate of interest lor call loans by reason ol' a sectir)n of the state hankino' law which says: 'Tpon advances of* money repayable on demand to an amount lu-t less than five thousand dollars made ui)on warehouse rcceijits, hills of ladino-, certificates of stock or dej)osit. bonds and other ne<>;otia')lc instruments pledoed as collateral seciirit> for such repayment, and any bank or individual banker may receive or contract to receive and collect as compensation for making such advance ann sum to he a^iral upon in writing l>y the parties to such transactions." Thus the banke'i- can charge any late for call money for sums of $.5,000 and moie that the borrower is willing to pay. With a tmie loan a loan made for a spccitied period, as ninety (lays— the rate cannot i)e higher than the maximum rate. Most people beliexf that a call loan is for one or two days only. Some call loans run forty days or even mori . The interest on it changes with th tiuctuations in call money rates; the interest on a time loan remains the same during the life of the loan. ■KIT. Loans on ojmi 'oook accounts. Soiuv bankers loan funds to business men on the security of open book accounts of their custonu rs or on insiaiiment contracts. This business is strongly discounten.tnced b\- the mon- conservative banks. Th.sc classify bankers who cML^a^v ni it with pawnhrokers. Hankers who do this business claim that it is exactly the same as ilie old business ol LOANS or THE BANK 327 discounting trade paper. Tliev argue tliat as trade paper is now no longer given by customers to the same ixtent as formerly, the merchants have none of it to dis- count at their banks and therefore it is permissible for tiiini to borrow on the funds due them from customers, although these are not in the form of notes. Conserva- tive bankers on the other hand say that utider present conditions of banking c()mi)etilion any !)usiness man can liorrow on his general en it all the bank funds he is I iititlcd to and that those merchants who can get funds (iiily by hypothecating and assigning tlieir book accounts aic undeserving of any bank credit at all. 408. Providing tcmporarij capital. — The financial manager of a business is concerned principally with liiidging over the interval between the ])urchase of ma- tt rials, etc., and the realization of the value of the out- put ol" the industry. The value ol' all the materials and stock represents capital wliich must be contributed by someone. If materials can In- bought on credit, the scllci- is the one who has provided that capital for a short time, tliough he may shift tjiis burden on to a bank by discounting a note taken in payment f( '• the materials. The l)uyer of the materials may thus jiartially escape Wiv burden of providing temporary capital. On the other hand his own customers — the purchasers of liis linished product — may put upon him the necessity of finnishing caj)ital to them by demanding terms of from thiily days to six months. In most cases the business man will find he is able to shift less of a burden upon concerns from whom he buys than that he is compelled to bear on behalf of his own customers. When coUec- tloiic ;ir!' s](!w tb.is e\t!'a burtieu i< corresi'on.ibnjrlv ui- creased. The task of the financial manager, therefore, is to 3i>8 MONEY AND BANKING ^^et Ihrouul, il,(. assisfancc of banks the use of capital not nmk'd by its owners. Banks act as agents between the owners and the nsers of capital. They are always ready to furnish capital to any one, provided the bor- rower can oive satisfactory security for repayment. The secin-ity offered to a bank may be either the gen- eral credit of the firm, l)ased ui)on its reputation for prompt payment: the possession of property above its liabihties: or the maintenance of a certain deposit balance at the bank, Jn case these are not sufficient, cai)ital may be granted on cohateral — some form of property hy- pothecated to the bank. Hni IH CHAPTER XXII LOANS a(;ainst (c)[. lateral 400. Collateral for hank loans.~The form of collat- eral most easily handled is no doubt stocks and bonds extensively dealt in on the Stoek Exchange and which are marketable on a moment's notice. Heal estate and other forms of permanently invested cai)ital are bad eollateral for a bank because of the difficulty of realizing ui)()n them quickly. The third ^reat class of property uhieli may be used for collateral is merchandise and ma- terials representing the investment of that form of cap- ital which it is the le^^-itimate function of banks to ])n)vi(le. If the calculations of the owner are not amiss, tills pro])erty will be j)repared for the market and sold u itliln the near future, so that it embodies the l)est (|ual- ily in a collateral security in that it will be licjuidated tiaturally and thus provide funds with which to repay the debt. HO. Merchandise as collateral. — The difficulties met with in tlie use of this most natural form of collateral lor bank loans have considerably hindered its emj)loy- inent as such. Merchandise and materials cat mot be deHvered to the l)ank as in the case of stocks and bonds, if they are left in the possession of the borrower they may disappear, or substitution may be made, or they may deteriorate through ne<^iect. 'i'hese risks can be u third i)arty, who acts as trustee for all concerned and 3Jiy iiSO MONKV ANJ) HANKING wlio is re<,uiml by law to ccni'orni to certain rule whidi make fraud and loss inipcssihle. 411. Advantages of good xairrh,,ivi(le the temporary capital to carry the merchandise, and their doinu- so may depend upon the ri^k invohed in loanin..- upon the security of the U'e-chandise. The value of a warehousing system, regulated by law, is measured by its service in eliminating the risi attend- ant upon loans on merchandise. 412. Loans on merchandise a legitimate function of banks.— The character of baid^ loans has changed greatly in recent years. There has been a marked de- cline in the amount of trade paper offered for discount and competition among banks has compelled them to develop new fields. The collateral loan is one of these, but few banks have been willing to acce])t anything e\cej)t stocks and bonds as collateral -loaning on merchandise is still regarded in many (juarters as a sj)tx^^ies of pawnbrokin- and is classed with loaning o!i book accounts. Xever- theless loans on niercjuuidise confor??! »ii.-.!v .,.4-1,. *t; --. — ..., .>...»„»i, i,». banking principles, and they promote the industrial prosperity of the community more than any other class LOANS ACiAINST CULLATKRAL S6l (if loans in that they give snhstantial aid to le<^itiniate (dinintrfu in niari^etab' goods, which is the basis of all l)iisiness. Anytlung which removes obstruction from the free passage of goods through all tlie processes tVoni raw material until they reach the consunier rep- II sents an economic gain. All other business, of what- t\er kind, is merely auxiliary to this fimdamental i.idductive acti\itv. There is no doubt that the inmie- (li.itc future will see a gradual elimination of the uncer- tairitits and risks incident to loans on merchandise and a (Irvtlopment of tiiis branch of banking. 41.'J. Statement iif a bank president.— On this subject ^i^. \;ish. former president of the Coi'ii Kxchange i?;iiik of New \'ork. spoke as follows at it.^ liftieth an- niversary baiujuet: The hank 1ki>, however, made two iinportnnt contributions to A' ■ ric:ui hankiiiii'. Prrsidont Dunham. Ijciny; familiar with the ^ram huslness, introdu'((K inmiediatilv on takini^- otficc, tlie un- usual ])racti('e among ijanks of : sisting merchants to carry larg(' stocks of grain and iuerchaniiise in this port, by making I(ian^ on that i lass <)( collateral wlien represented hy the ware- )iiiu>e reci'ipts or bills f latling. It subjected us at the start ti) till' stigma of being a jiawnbroker's shop, and this stigma " - fi'i'elv ap})lied. But eventually the principle of advances I ■! Mil I'chandise «as adopted by other banks, luitii now it is well- iilyh universal. It has always been a distinctive jjart of our huMuess. Mr. Dun'.iam used to say that wheat and cotton, wool .•uid pork, lard and coffee were as good as gold, and he was rcadv to give gold to tlu man who was willing tn pledge these ( iiiiiiiiodities as security for its payment. He, howt . rr, con- tiind his opcrati- ns to the great staples named, because the 'jiiihtv aiui the price were less subject to wide variations, and UHS chary of general merchandise, where the differences are much more marki'd, and to a non-dealer somewhat deceptive. 'J'his preferenie for the staples has not prevented us from going ;5:i;^ MONEY AM) IJANKINC; %mi'^ ■f i\,v their aj prova! 41 J.. J. ate of rcarrhouNf rtccipff.—Tht ^reat ]imit;i tion to the use of nierclmndise as collateral is not so miu ii in stability of \alues of the commodities as it is the diHi- culty of maintaining- intacL and secure the collateral itself. The -levelopment of wareliousino' and the use of the v.arehouse receipt under such leoal reoulution as to ^-uard a-^-ainst fraud is gradually diminishing the risk of merchandise loans. •il5. l\iif\,rm hnc. — A valuable contribution to this end has been the drafting of an "Act to make uniform the law of warehouse receipts" l>y Uie Commission on Uniform State Laws in lOOO. 'J^he success of the Com- mission in getting its uniform law ol" negotiable instru- ments adopted in twenty-eight states and by the federal government makes it more than likely that this ju-w act will soon become a law in all the states. As in the law of negotiable instruments, the wai-eliouse recei])t law aims to codify existing laws as far as itossible. Whenever anything new is projjosed, it will invariably be found a step in the direction of promoting the busi- ness of loaning on merchandise. The passage of such a law in states which have not already a similar one is of the most vital inie'cst to merchants and manufac- turers as well as Itank'rs. It will jiasten the time when loans will be made as readily on warehouse receij)ts for stored goods as they are now made on stocks and bonds. The advantage of the warehouse recei})t is that it .. ....1.1. jLI - 1 . 1 ■' ' ■ • • • • c::.i:;ir:- i;;;; ^UOliS liesci"! iii. i.i iTi il It' i>c isoiti or pie{ig'e(i for u loan uf inoiiey by the mere delivery of the ware- * Loans a(,ai\m i ollaikhai, 333 I Iioiisc rccci])t, tl)iis avoitliiio- the iiifoiiveiiiciR'c of an ncliial innoval or delivery of the property itself. In (itlier woids, the warehouse receipt is u sytnhol for the pinptrty (k'scrihed, and the dehvcry of the receipt is in l.iw a deli'' v of the j)ossess!on of the propei'ty. 11<> Hinli involved iit loans oh xitirclionsc rcfcipls. — 'fi.c danger of accepting a warehouse receipt as colhit- I r;d may arise from an insutlicleut or false «lescription if the ])roj)erty, tlie uufaithluhiess of the warehouse- man, who may misapproj)iMate the property coiDmitted to his keepinjL^; neht lose his claim to the pi-oj)ei'ty ,'Uid would he forced !'i rely upon the personal responsihility of the war.'- Iiousema?! for re!ml)ursement of liis loss. 417. Under tJie present laxc. — I'ndcr the ju'cscnt law ill most states rhe svarehouseman is responsihie as hailee \' ti-'i r^>n) >i ! ^i -t I Ml II mien f»t^»-/^TM'i'i 4 II tails to take due care of it or if he falsely or insurticicntly •Mi .MONEY AM) HANKING I fc describes it in the receipt, the holder of the receipt nu lose his chiiiii to the property and mav have only i\ an action for (hima'j-es aiji'ainst tl le w arehouseni 418. /.v,s'//r of receipts safi guarded ~ propose 1 1 act dn-ows definite restrictions aronnd issuin^r of receijits, and makes the warehouseman cni,.inally hal)lc HI many -.ases. It provides tliat all liens on the goods must he set forth in tlic receipt, inchidinn- the rate of storage charges. Tiie warehouseman may not insert any clause absolving himself from his legal liability lor due care. -i)uplicate and non-tiegotiable receipts must be i)lainly markec' as such. 'J'he warehouseman shall be obliged to del.ver the goods on the receipt if the demand is acco?>;panied by an otfer to satisfy the ware- liouseman's lien, a surrender of the receipt, and an ackno.vledgment of delivery. The warehouseman shall be justified in delivering the goods to any one tendering the receipt iiroperly endorsed. If a thief presented a negoti;ib|r receii)t properly endorsed the warehouseman would be proU'cted if he delivered the goods innocently. 41!). ProUctian U, holders of rceeijds. If the ware- houseman shall fail to take uf) and cancel a negotiabit recei|)t when goods are delivered, he shall be liable lor fadure lo deli\cr the goods to any one who j>urch;is(s for value in good faith such receipt, whether such pur- chaser ac(iuire(l title to the receij)t before or after the delivery of the goods by Ibis warclioiisrman. A warehouseman shall be liable to the boldrr of a receipt for damages caused by (Ik non-exislcncf of flu goods (V l)y till, failure of tlir g,,o.ls to correspond to the description there.. f ;!i the rcc. ipl at the tune of its issue. If, however, the goods aie descrilu'd in a reci.pt merely by a statement that th(_\- are said to br goods of a ccrluin kind, or that packages containing the gooJs LOANS AGAINST C"OLI,ATERAL 33.^ ;ire said to contain goods of a cei'tain kind, or by words of like import, sucli statements, if trne. shall not make ]ial)le the warehouseman issuing the receipt, although [lie goods are not of the kind whicii the marks or labels ujxrn them indicate, or of the kind they were said to 1)0 hy the depositor. This makes the warehouseman liable for what he asserts only. 4'J(). Gnnmhmcnt not allmccd. — (ioods delivered to a warehouseman who issues a negotiable receipt there- for cannot thereafter, while in prvssession of t!ie ware- houseman, he attached l)y garnishment or otherwise, or he levi( tl ui)on iindcr an execution, unless the receipt be first surrendered to the warehouseman or its negotiation iiijoined. In most states the })resen'i laws disallow any !4a!tiishment ; it was thought best i!i this act not to taivc s(i extreme a positi(..i but to cover the essential practical point by making it a condition ol' the validity of sueh MT/iu'c that th<- negotiation of the receijjt be enjoined or the document impounded. A |)e'-son to whom a negotial>le receipt lias been jiego- tiated accjuires, accoi'ding to the act, such title to the goods as the person negotiating it had. and also the direct obligation of the warehouseman to hold |)ossession of \iie goods for him according to the terms oj' the receipt ;is fidly as if the warehousiiuan had eontracted directly with him. t-L'l. rciiaUi/ for iUcf^nl use of rC(rij)ts.— l\ shall be a cnmirtal offense for a warehouseman to issue a receipt for goods not actually received, or to issue a receipt knowing that it corrtains a false stateiudit. or to issu'- iliiplicate receipts not so marked, or to issue a rcceij)t for goods of which hi himsi !f is the ownir without stat ■ iiig that fact, or to dclivei- goods without canceling the receipt. ^\ny pi rson who deposits g(H)ds to \shich ;5;j() MONEY AND BANKING he has no title, or upon which there is a lien or mort- gage, and takes a negotiahle receipt therefor witli intent to deceive without (Hsclosing want of title, shall be guUty of a crime. Loans may he made on receipts under such a law wi^h little risk or incoinenience to the lender. If the goods are insured his chances of loss are practically limited to deterioration in the (juality or value of the goods. Sea- sonai)le goods in old storage, such as fruit, butter, eggs, poultry, etc., must l)e sold at certain seasons, lest they shrink in value by having to compete in the market witli fresh goods at cheaper prices. 422. T rails fcr of iitir to lender. — ^lany banks preier not to accept recei])ts for warehoused goods as collateral at all but retjuire the transfer on the books of the ware- house to themselves, takhig a non-negotiable receipt therefor. lit' CIIAPTKK XXIII CREDIT DKPART.MKNT OF A BANK !••-'*{. Evolution of the credit depart went. — Only witliiii recent years have credit departnients appeared in !lie banks. Formerly the cashier was snpposed to keep [Hrsonally all the credit information. However, it has ludi found [)referal)le l)y the banks to em|)loy a comi)e- t' lit credit man, whose sole business is to accumulate iiifiirmation on credits. In some of the lar^i^er city I'.inks and es))ecially in the offices of a commercial paj)er liniise, there are highly or^^anized systematic credit l>u- rciiis. which have on file every bit of information rei-ard- iii-i' the credit standin,ned Accninls Receivable nni'-iint \n (llliiT assets nsid as collateral . I.NSI'RANCF: on merchandise $ buildings . .1 machin iTv $ Total Ihsiiranct HISINKSS and RESULTS: Annual Sales (nr the year ended... 190. or from 190 to Hin . (.r '=^s Prcitils on Sales For the same p.riod K.x|ii use of Conducting Business Nfi Profit " '[ '■ ][ Other Inc. .me. including investments !«'. n.liined I'r.ifil WITHDRAW .\1.S bv 1 '.HTNERS in.it included in expense of conduct ing business) fr.m 1 !»0 . . to 190.. HAD DFKTS f..r the pern.d fr.im I'.XI to 190 . SI'K'IAI. t'API'l'AI, contribuleil bv until 190., . 190. . 190. . PEN ERA I, PARTNERS; name Ontside Net W irth II) ( HKDIT DKI'Airr.MKNT OF A BANK ;3;jy I V ACCorNTS: nli.Tr kept oilur lliaii abcive . iHTGAUKS; ou what as&ils a lion Avcrnso TKKMS on whicli we SKMj Arerage TKK.MS on wliic-li we ISUV HATK of ORGANIZATION' and KXIMKATION cif I'AKTXKHSHIp '.'.'..['. TIMK "f YKAR wlicn Notes ami Ai-roiinls Hcipival.I.- <>i i-iistoiiiers, ['iiroIN-rtpd, are jjeiierally maxinnini iniiiiniiiin TIME OF YEAK when Stocks of Morrlinndise on hand aro cpui'rally ir.aximuin mininunn TIME of YKAR when Liabilities are maximum luinimum STATKMKNT: is it based on artual inventory.' if so, Date VKKll'ITATlON: have the bonks been audited by a Certilied Public- Acer.untaiit ? if so, Name and Date of Audit lU'SINES.S: what kind of business do you ronduet ! BOOKS: wliat kind of books do you k. cp? (Please si:.'n fiini name) ^Mte Signed. ... 1 !io , , Ry Please Give PaMieuIars of Ivnh Parrel of Real Ksiale I>esrription Street and number City or town and state Title in name of Estimated value Mort- gages Equity ■ 'I'lic l;i\v is .still !iiK'(.itai(i toward jxi'soiis wlio make ! iNc statoiiR'iits for the purpose of ^aiiiiii^ civdit. The "tniioiis failure of A. Hootli and Company of C"liiea^»'o ill I '••OH iiidiieed the legislature of Illinois to pass a law !i \'M)\) making it a eriininal offense to obtain loans M false or misleading- statements. TIh' jutialty for i'Mntrsois tint ind impiisonmei.t. I"_'.5. Credit <'/^'Y7/( /( v. 'I'he second .souire of informa- m is the credit a<4-encies. The chief credit a^^'-eneies in tliis country are Dun's and Hradstret fs. Concerning'' tli< function of 'hese a<4i'ncies one hanker has said: ' \n\ man is unwise to base a '^.'A) credit soklv on an mo .M()m:y and banking I! If agency rating or ivport, ])nt any man, business house or institutio;i is (loul)ly unwise who cannot get hack in full all that he i)ays out to the conmiercial agency, pro- vided lie knows lunv to use the information which he receives. " The fact that the agencies charge the same fee for reporting upon a credit involving .$o{),()()0 as they do upon a credit involving oidy $.5, makes it impossible for them to do n)ore than superficial work. The reports are obtained by reporters who are not expert credit men, and wlu. are reijuired furthei-more tf) report upon ten to fifty concerns in one day. The reporter will first try to get a statement iVom tlie concern under investigation, and then will go to the banker or local lawyer for infor- mation. The n)a\iinmii salary of the bulk of such ro- j)orters is not much abo\e '$20 per week. The business is very [)rofitable, in the case of Hradstreet's paying a ])rofit of (i< ■_. per cent on its capital of if^l. .)()(),()()(). Tiic charge for the service of an agency is ^MH) a year. This sum entitles the subsei'ibcr to 100 special reports and a book of j'atings semi-annually. The reports are valu- able in suggesting points which might otherwise be over- looked and in tabuhiting information obtained in other ways. 4'2(!. Duties of credit num. — It is the business of the credit man to cndtivate exery possible source td' inforin;i- tion bearing on credits. He must consult court records to find suits which ha\e been filed or judgments ren- dered, lie must know when any of iiis cHents have P'corded mortgages. lie should find out the business alhhation of bis clients so :is to get clues as to the kind of business done by them. The credit dej):irtm(td of a I);uik affords the best op- porMmiiy of any de|);n-tmt nt tor the young man who m CREDIT DKrAKT.MKNT OF A IJANK 541 I wishes to learn tlic baiikinir business. The experienee ())' iiettin<»' information about the business men of the cniiiiiiunity and abc^ut the peeuhar eonditions existing iii the various hues of trade, will eultivate in him the jMiwxr of ju(lr an officer. This can scarcely be said of any other Mil';.rdinate position in a bank. {••-'T. Tltc commercial notc-hrohcr. — The note-broker is a middle-man betwcn the lending bank and the bor- iiiwing business man. His profession is to borrow iiKitiey for other people, and the need for his services ;iii(l the amount ol' his remuneration will depend upon his skill in i)lacing loans and in obtaining favorable Iniiis from the lenders. To borrow money to the best advantage is an art recpiiring exj)ert knowledge ;iii(l ability beyond that of the average business mana- ger, and if his borrowings ai'e large enough to make it worth while it is ])rotital)le for him to engage tiie services of the note-l)roker in this business. Tlic business of note-broking has changed radically within the last decade and is still in the process of raj)id lit \el(;pment. The old-fashioned broker was simply an ;ii4rnt who. for a certain commission, placed the promis- soiy notes of Jiis principal at the lowest rate of discount ht cituld obtain. lie incurred no liability, had no occa- sion to employ capital of iiis own, and did not attempt III place the jjaper far from the locality of its inception. I-'JH. Clian^c in the business. — The note-bnjker on iniiimission !;as givcji place to the dealer in comnjercial paper who Iniys and sells outright the jjromissory notes of his clients. The !)usiiRss is practically controlled by seven or ei lit large lu'ms whose operatiorcs extend over a large part of the w hole ctninlr} . The nature of .'5 ki :\I0M:V AM) HANKING li- pi': tl le business is sudi that the tejukiu/y toward central tion in a few sti'on^- hand disad iza- s is inevitable beeanse of tht disadvantages under which the sni dl operator must )() r. Larne caj)itaK the eonfidc-nee of lend ers. hd thoroun-hnoinn- and elHcient credit department wjiicli IS necessarily expensive, and a hir^e staff of salesmen. are factors against which the small broker finds it im- possible to conij)ete. In order to buy and sell paper to the best advantage le modern note-broker, oi- more properly the dealer in commercial ])aper, must have a capital ai)|)roximatimr 5M.0()(),()()() His chents demand the money u|)()n their notes at once and the notes must be held several days before they can be lealized upon. With such a capital our typical dealer in commercial paper can do an annual business of $10().()()().0()() at an exj)ense of about 8l()0,- 000, or one-tenth of 1 per (vnt. He can make a '^ond profit if he can net one-fourth of 1 per cent or even less mari^in on the ])aper he handles. 4-Jl». Diiiuind and .siijjj/l// of commcrc'ud paper. — In times when the demand for loanable funds is <,n'eat and the ii.tercst rate liinh. the dealer has no difficulty in purchasi , first-eiass paper. He does not need to seek out new clients but on the contrary is kept busy market- in^' the pajHr of his old clients. The energies of the dealer are directed almost I'nlirelv to seiliiif. 'I'lu house w ith a well-or,i>anize(l and efficient selliim- fonv has a ^reat advantane over competitors. The firm here in mind has twenty salesmen coverinate in the \ tar, when the money returns to the banks, the supply loanable capital may far exceed the demand and very low rates of interest may prevail. There is scarcely any locality which is not subject to these seasonal tluctuations as well as the accidental fluctuations which may occur at any time. \'M). Areas of high and loic rates. — The monetary ronditions of the whole country might be represented ill much the same way as the weather conditions on the weather map — there are areas of high money and areas of low money, and these "highs" and "lows" move across the map with more or less regularity. lieing able to predict the movement of the "lows," the expert dealer in commercial paper is able to take advantage of low interest rates wherever he finds them, while the borrower himself is confined to his own inmiediate locality where the rate most of the time may be higher than the "low" in some other section. Owing to his ability to sell paper at a lower rate of discount than the borrower himself, the dealer may re- alize a haiulsome profit v,hile discounting at the same late as the local banks. As far as the rate is concerned, the borrower may just as well patronize the dealer as the banks. There are, however, four additional hiduce- nients which the dealer may ofi'er. r.n. Discount offer by dealer. — (1) It is an almost universal rule of the banks to reijuire that the l)orrower shall maintain a dej)osit balance e([ual to at least 20 per cent of his loan. This means that the borrower can actually use but $80 out of every $100 Ijorrowed froui R lit lUi MONEY AM) B.\NKIN(; the bank. If he has ho rrowed at the rate of .5 per cent or everv avail- ititcrest. lie aetiially pays over (5 per eeiit f able $100. U Ik- sohj liis paper to a dealer hJ would realize at once the full face value of the 1 .an. (•i) liy selling his paper thr()u<.h a dealer he k his credit at his hank nt^.^n -itwi iii.;.>i,v.,:..,„i „.. ^i. ps )ank open and urnnipan-ed, so mat iii case of enierfrency he has this resource to fall hack upon. (3) }W estahlishinfr relations witli a dealer he creates a broader market for his paper and may reasonahlv expect the dealer tt) favor him as an old eustomer when otherwise he could not get accommodation, perhaps he- cause of a stringent money market or because his credit showing was not satisfactory to those with wiiom lie had no previous dealings. (4) Tlie dealer has facilities for floating a much larger loan than any bank could handle, thus relievin^r a large borrower of the necessity of negotiating with several i)arties. Dealers in commercial paper do not endorse the notes they sell, nor do th«^y assume any liability except for their genuineness. The notes are made payable to the maker so that they may be negotiated without endorse- ment. The success of a dealer is so closely dependent uj)on his reputation for handling only good jjaper that he will use every effort to i)rotect the holder against loss; so there is practically little risk in buying his paper. In ca.se of a failure the dealer will take charge of the claims of hi.s cu.stomers, and as this usually makes him the largest creditor he will Ik- able to jjrevent undue loss by reason of unskillful handling ol' assets of the failed firm. 4.'J2. Cmlits.— The ])est guarantee against loss fur- nished by the dealer is the close attention given by the credit department to every note sold. The most effi- CHEUIT DKl'ARTMKM' OF A HANK 345 iKiit credit (k'partmt'iits in the eoiuitry are those main- tained hy the dealers in coniniereial paper. \o cHent is takt n until his tinaneial conthtion has \\ ithstood a most search iii<:;" investi<4ation. A statement is always re- ([uired and must he revised at fretjuent intervals. Kach salesman has copies of these statements to show to pros- pect ive customers. Fnder orihnary circumstances no [Kijxr will l)e l)ou<»ht l)y the dealer uidess the statement of the maker shows (luick assets (cash, mcrchindise, ami hills reeeivahle) of at least twice the value of the liahilities. The credit department may he regarded as tlif most vital part of the husiness of dealinii" in com- niercial [)aper. Few hanks outside the largest cities lia\e ci'cdit facilities and they are disposed to rely more aiiii more on the information furnished hy th(3 note dealer as experience proves its reliahility to them. l-:i."{. Si:::(' of notes. — 'I'he notes sold are usually di- vided into amounts of $5,000 each and rarely run longer than six months, tiie average heing about ninety days. I'lices are (juoted in per cent, the higher the rate of dis- cmint tl:^' lower the price of the note. For example, a note for .$.'5,000 due in six months without interest may It' bought by the dealer for (J per cent, which means that it would yield to the borrower $.5. 000 less the interest nn Sj.OOO at per cent for six months ($1.)0) . The net yidd would be, therefore, $.5,000 minus $1.50, or $4,8.50. It' the dealer sold it immediately to a bank at .5' j per c(nt for six months (or whate\er time remained until tlic note was due in case the dealer had held it for a while), this would amount to $4,802. ,30 ($.5,000 less '*i;<7..50) . The profit to the dealer would be the differ- ence between $4,8()2..50 and $4,8.50. or $T2..50. The business of dealing in commercial paper and dis- t'ihutinu- it tlirougliout the comitrv on a large scale MICROCOPY RESOLUTION TEST CHART ANSI and ISO TEST CHART No 2l 1.0 I.I 1.25 U^yB 12.5 2.2 3? 13.6 1.4 2.0 .8 1.6 ^ /APPLIED IIVHGE Inc 'ft', ^ f>T.* Moir ''.t»M!t ■■!)! 3+6 I' MONEY AND BANKING is so recent and is developing so rapidly that the total effect on the banking situation has not been fully worked out. An irievitable tendency will be to equalize the rate of inerest throu','Out the country; the smallest country bank will have loaning facilities almost as good as the largest city bank. There will be no inducement for it to deposit its surplus funds in New York at 1 or 2 per cent interest when it can buy first class paper at much higher rates. On the other hand, business firms who are large borrowers will have a market for their paper as wide as the whole Tnited States and will thus be emancipated i'nmi l(K'al restrictions. 1 CHAPTER XXIV inSTOKV Ol HANKINC; IN THF. I'MTED STATES ft I'M. CJiaractcrisfics of carl// bankhi;i(. -Tht early 111 loiv of l)aiikiiiir ill the I'nited States is for the most part a history of tlie issue of eireulatintr notes. Prior t(r the national hank aet of 1805 whieh greatly restricted noti- issue, the deposit eiu'reney re])resented hut a small jMiiportion of the eireulatin^ medium of the country and hence occupied a relatively unimj)ortant place in tlic business of hankin<4'. l^articular attention must he ^i\en. therefore, in a discussion of hanking prior to I (St;,"), to the success and failure of the various plans for issuing notes. V.l'). licldtioiis •iciih govern mciit. — Another function 111' early hanking, however, was to facilitate fiscal op- nations of hoth the federal and state governments. Although this has continued to he a hanking func- tiiiii to the |)resent day, its early history plairdy shows that it is not a safe one, however eHicient it may s(irn; and there is a marked t'-ndency toward the com- pete dnort'cnient of hanking fVom financing govern- III! nt expenditures. 'iMiis di\-orcement has already taken ))lace in the opeiations of the stales, and remains iti the operafiotis of the federal government oidy in the requiiement that hank notes he secured hy a (i( posit of govermuent honds with the Tn-asury. a re- (luireincnt which creates a fictitious demanlish((l hy .Mcxandei- Ilamdton. lor several years it ixisted as a prix.ilc l);n\k l>Mt \\ ;is fin.MHv rh.-ii-tfriM! hy the Icgislatun in ITIM. In hoth states an attempt IIISTOHV OF BANKING SVJ uas made to regulate banking in the interest of the piihhe welfare, and as some of the problems wliich the Kgislature attaeked are still with us their consideration is interesting. The most im})ortant restriction dealt with the issue of notes. In Massachusetts it was provided that the outstanding loans and notes or credits and debts (ex- cept to depositors) should not amount to more than twice the paid-in capital: in \ew ^'ork, the debts of the bank, over and above the money then actually de- posited in the bank, \\ei"e not to amount to more than three times tile j)ai(l-in capital. Thus a distinction was made i)etween the lial>ility of a l)ank to its note holders ;inil to its depositors: and there is no doubt of the ex- istence of a reason for this distinction at that time. The deposit cunency was not de\ eloped, and when bor- rowtrs a|)])eare(l they wanted notes which they could use as money. Deposits were not created, therefore, by loaning as they ai'c to-day, but entirely by the actual deposit of money, a process which did tiot in any way ineiease the pro|)oi-tion between the bank's demand obli- gations and its unmatinrd assets. The dej)osit account was exchanged for moniy. whereas the bank note was ex- lk from traiiitig in the stocks of tile I'nitcd States oi- any of tin states. This was ividently an attempt to sej)aiate banking and gov- ernment and. as such, was a cori'eel prinei|)le. 4.'iH. lAunihis oil I'oiih' .v/ocA'. The liank of Massa- chusetts was ))rohii)ited fiom dealing iti l>ank stocks, .inother jjrovi^ion which was fimdamentally sound, lilt piai'iicc oj dealing in. or lainer ioaning on. bank stocks ii.is many dangers, as was am[)ly proved in 11 le m i i^ .inle^^H ,'}oO :\:o\KY AND HA\KI\(i m- If. pari.c of I nor. It enables unscrupulous financiers t.. Ihiv one hank, deposit their stock with it as colhite.al for a loan, and with the proceeds of the loan to purchase the controllino- stock in another hank. This operation may he continued until a nuniher of hanks are under the same ownership, the henetit to the Hnancier arisin^r from the fact that he obtains control and conserjuently increased credit from them all. Its dan^^er is (hie to the fact that any calamity which affects one bank must affect them all. The Hank of \ew \-ork was restricted from loanin,ir on real estate, or holdinrr it except foi l)ankino- purposes or when it came into its possession m settlement for debts i)reviousIy contracted. This was likewise a wise i)rovision and one which is found in practically the same form in our i)resent national bank- ing- law . 4.3!). First liauk of the Vmtcd States.— Tha First Bank of the Tnited States was chartered by ConniTss in 171)1. The charter was ^ranted in spite of strony opposition on the i)art of those who inveif.hed against the tendency toward centralization of ^^overnment, hold- inn- also that ("on^nress was not em])owered by the Con- stitution (o create banks. Alexander Hamilton, then secretary u\' the treasury, took the <,n-ound that this l)ower was an im|)lied one, and his opinion prevailed. The bank was capitalized at 8 1 ().()()().()()(), divided into 2.>.()()() shares of .SMH) each. Of this total ca|)ital .t2,0()().- 000 was subscribed by the «o\ernment and paid for in installments. The remainder was subscribed by the I)ublic. one-fourth in specie and the balance in ^(nern- ment securities | bearing- interest i. The bank was o(,v- <'rned by a board of twenty-ti\ c .lireetors, not more than t liree-fonrt hs ,- (Mil). 000. There was no market for government bonds, hence it became necessary for the government to sell iK stock, which it did in 1H02. This sale had only a iirtiellcial effect on the bank, and it is hard to justify a! all the government's part ownership of it. When Ihe bank was organi/eil the govenunetit did not netd credit; it was given no control ovei" the bank except the right to investigate its affairs, which it seldom ex- t rcised. Hence the bank was not made anv more secure ^ 44» 352 MONEY AM) BANKING ! !■ m as a place of deposit for ,i.overnm(nt iinids; ami it had no surplus ou hand to luvest. If the /rovernnient hc- came a stockholder for the sake ol' profit, its jud^nnent was correct, for the dividends of 8 per cent were paid annually, and the stock it held was sold at a eonsiderahle advance. 441. Opposition to rcchartcr.—ln 1800 the stock- holders petitioned C\)n<.rcss for a renewal of the charter. and their petition was ably indorsed hv a report from Secretary of the Treasury Gallatin. lie reviewed the successful history of the hank and recommended th.it Its capital he raised to' .$;j(),0()0,()()(), three-fifths of whidi It should he forced to lend to the ^n)vernment. Vn- fortunately, however, C"on<.ress failed to act and the question was tabled until the succeedino^ C'on^rrcss. \\\\vn the question a^ain arose in 1811 opposition to the charter was not only stron^^ hut or^ranized. First, those who believed in a strict construction of the Constitution Mere a^^ainst the bank. Second, the Kepublicans. now in power, denounced the hank as an aristocratic institution. They })ointcd out that three- fifths of its slock was in foreion hands. A majority of this was held m Enriintin<4' the charter. 'l'!ie chai-ter was modeled after that of ^hv First Hank. It was to he the depository of pul)lic funds. It was to he yoNerned hy t\\cnty-ti\e (hrectors. i\\c of \^ horn wvvv to he named hy the Presideut of the [ 'nited >l;itcs. Its notes were made i'ecei\al)le for ail (lel)ts i" the federal .u'o\ ( rmiient. l-'oreinrn stockholders "Mild not \()te. It was re(iuiri(i to j)ay (le])osits as Will as notes in specie, and a forfeiture of 12 per cent ''.IS i)ro\ ided in i-ase it faded to do so, W.i. liidcmpt'uiii of tiiiics i;i spicic. This was a gicat step toward sound hanking. Although deposits VII— ,'3 334 .AI()Ni:v AM) HAN KING \l [i -■ lit! Mk '!!i Iiad ;il\vays horn iioiiiiiially payalilc in spo'cic, tlic cns- toiii had ^row fi up ol' paying- them in Uw iiotcfc of dlli.r sptrie i)ayino> hanks. If tlicsc hanks hapiH'ncd to hr i-einote the nnlcs circ'iiialcd at their fair vahic less the <\- prnsc of n'(icnipti(.n: the rcsnlt was a non-nniroi-ni vuv- nncy. W'liilc tiir nrw i( ouhitidn did not cniirclv pre- vent the eirenhition of si-wral kinds of eni'reney. il lielped to do so. and was a I'eeonnition of the statns ami possil)ilities of the de])osit system. The foi-feitiu'e ol' 12 iKT cent in ease of suspension of speeie jjaynients was intended to prevent a profit hein^r made from sus- pension. Many of the state hanks liad heen ahle to pay (hvidends when they eoidd not redeem either their own notes or deposits e.\cej)t in the tiotes of other non- Sj)ecie i)ayment hanks. 444.. Mis)ii(in(tu:c)iuiit of llic h(niJ,\ — Vudvv this char- ter twenty-fi\e hra.nehes were estahhshed and the hank soon hrouo'ht al'out resum|)tion of s[)eeie payment. This. howe\e!-. was the only henefit it conferred for the first two years of its existence, as it was shamefully mismanaged. Karly in its career it heoan to loan to stockholders on stock which was not yet fully paid for. Speculation in the stock foilovved. its pi'icr advancing and the hank Ioani!ii> its pai- value freelv. The charter l)ro\i(Jed that no (li\idends shoidd he |)aid on stock wjiich was not fully paid for. hut tiiis reouiation was violated. The Haltimoi-e hranch was in (lu- hands of nnscru]»nlous ofIice<-s who detrauded il of laro-c sums. Hence, up to ISin th" Seeon tlic \ai-ioiis abuses that had spniiio^ up. r(di!ciii.<4' loans to stockhohlcrs. incrcasiiin- ivsci'\cs hy iiiiportalioii of sil\ci\ and rc^;idatin<4' the issue of notes. His administration was so husincss-Iike that tiie \nv.\k soon regained popuhn- confidence and j)i'ospered ^n-catlv the ' nsuin<4' decade. The constitutionality of the ^overnnienl hank was settled in 18U) when, tlie Su|)reiiie Court, hy C'ln( f .fiistice .Marshall, handed down the decisio?i that the istahlishnient of the hank to assist the fiscal oj)erations of tlu' ^(nernnicnt was an iiiij)lied ])()wer of the Con- stitution. It was further decided that the states had i\n power to tax the circulatin^r notes of the federal li.ink or of the other state hanks. ]?oth decisions were ( xtieniely iniportar.t because a different rulin<»' on either would have made inii)ossil)lc not only tiie Bank of the ( nited States hut our })resent national bankin plainly showed his antij)atliy, but in IS.'JI he spoke in I niildiM' tone. lie \\as still kriown. how(,\ei-. as an opponent of the bank. In IS.'il I lenry Clay, the candi- date for President on the W'hi^ ticket, came out em- uhatied.lv for .•■ rfp.fu;!! f^f tlif i'h!>rf.'>r '!'!•..-> l-.-sj-.l- -.•,■•:- '■•■nerally populai- and Clay was rtiemptini;- to cap- i.iii/.e that popularity. JJefore the election a hill pi-o- '4 ;5.-)() .M()M:V AM) H.WKINC, Itii vidiiiir for the ixiic^val oT tin cli.'trtcr was |)assf(i 1)\ C'oiin'i'i'ss and \i't(H(l liy Prcsidi lit Jackson, so that tin (luc'stioii lu'cainc the priiu-ipal issue ol" the ciisiiiiin- caiii- l)aioii. TIic (11(1 of the Sccoiid Hank of the riiitdl Stales was in \ iew when Jackson was elected. Ill 1S.'{,'J the ^overnnient deposits were withdrawn I'roiii the hank and c-uicellation of the <4<)\ i rniiient's sto'-k was reciuested. To pay off this ohlii.-ation \u\\ stock was sold, and the hank ohtained a charter from the State of Pennsyh ania. It was never auain siiccess- t'ul. however. princi|)ally hecanse its ea])ital was too lar-i^e for operation in Philadelphia. It was comjjclled to loan lai'^e ainonnts on the stocks of \ arions companies which Wfi-c hein^- formed in all parts of the country. The panic of ] S.'JT madt many o'' these stocks worth- less, and the hank was forced to suspend. In IStl it iiaiik,s ill New l\ii<4laii(l Ixcaiiif iiiciiihcrs of the Snn'nik svstt'iii. wliifli c'oiitiniud until tlic national Itankinu law of 18(;.->. It soon l)fcanif a cIcarinLC Iiohse for hank nok's. ainl jiisl as tlu' c'iiy ck'aiin^' houses oll'sct the I'i'cdits and (Ichits of the xai'ii.us hanks against each otiu r in siicli a way that only halancis ai'c j)ai(l in cash, si the Siitrojk l)ank canceled the hank ohlinations of all Xew Imil;- iand. In ISl-.l the Massachusetts law \',as ciian^'ed to l)ro\ idc that no hank should pay out any notes excipl its own, a |)i-)\ision which strengthened the Suil'iilk systcDi l)ecaus(.' it made necessary (luick I'cdeniption. All hank notes issut'd would circulati in the pockets and tills of the pe;)])le as lony as thei'e was actual denia.iid foi- them: when this demand suhsidtd th;\- would \>v dcpositeii in a hank, and since the\- could not ayain hr paid out tiny would Ik (|uickl\- I'cdeiincd at the SuHdHx Hank. Dufino' the yreatei- |)art of the existence of the .Suf- folk Hank there was no piox ision in Massai'husttts fof kccpiiio' a specified I'tsei'x i'. The system worked so well, in fact, that specie was seldom demanded. I !i 1H.")H the leijisl.-itin'e passed a law pro\ idiiiLi' l<>ra rescr\c of 1.") per e(iil against hotli notes .and di posits. 'I'liev Were thus recoLini/.ed as liahililies of the haid<. eipial mi evei'y I'espi ct ; nor was thei'c any reason I'oy tlivin^' tli< notes ;i prefereiiee or lua I ul aiuHii^ a s|)ecial i'es( i\c I'm- till in under the system of ijiiick ri deiiipt ion which i\ isti-d. The iiotis weiT not iiileiided for general einii- lation hut foj- redemption w h' n tin nerd for iJu ni dis.ippeared. in tin same maniiei- thai our checks ;md drafts an- ri.de(iii(d to-da\. I ndi r this s\slem tin IIIS'IOHV OF l{ANKI.\(i ;i.->y i\ ■Awni^c 'ilV <'!' tlu' l);iiik note was t'oiiiul to he altoiit ti\ e weeks. 44S. Xi'xc Varli sf/.stcnis. — The hanks of New ^'ork \\(i-e oj)erate(l alotiy- different lines. There were two |ilans of note issue: ( 1 ) The safety fund system and r2) Ihe hond deposit or tree hankin<4' system. The th'st is espt'cially worthy of noie hecause of the reeent pi'o- [I'lsal of the Demoeratie I'arty that i)ank deposits he niiai'anteed hy tlie o()\ fniment. a |)roposal whii-h I'ests nil the same hasis. 'IMie second plan is interestin<^' he- cause il was adopted l)v the federal <4()vernment in lH(i.') Ill sfcui'c the nolc issues of the national hanks. tH*. Sdfi'lfi fund s//.st(i)i. — The safely fund system was estahlishcd in 1H2'.>. Ivicii hank was rciiuired to cniiti-ihutc annually one-half of 1 |)er cent of its capital 111 a s|)ec!al fund in the hands of the states until its ciiiiirihutions should amount to '.i per cent (d' its capital. ( )iit (d' this fund all the dthts of failed hanks (cxc-ejjt lliuse to stockholders on their stock) were to he paid ;iller the assfis of the hank had heen exhausted. In is;{7 the law was amended so that the notes of failed li.iiiks could he paid immediately. pro\ ided they did not aiiioimt to more than two-thirds of the money in the rmid. In that ycai- sc\t'ral hanks failed and their notes siilfcred no dcpicciat ion. After IHtd, however, the niiiiihcr of hanks wliicii failed was so lar<4'c that the safi'ty fund was Ino small to meet all theii' oliliLjations, li"lli notes and di posits. .Vccordiunly in 1 S l^.'{ the l.iw was ai^ain ariK ndi d so that the fund was made applica- hle otd\ to the paxiiiiiit of the nol( -, of the insoKeiil !>anks. t.">(>. Hi, 11(1 (liposil s//.slt!li. In IH.'JS. ||owe\ei\ the IhiikI deposit systiin was t stahlished, and al tei" that dale m m .i\ m^ ■V M * 9 .-I SGO MoMV .\\i) i].\\KI\G iill i^-. hunks iiic'or[)()rat(.(l uikKt lliat plan. 'J'lus Mrakcjicd tlic s;it(ty I'uikI hccaiise Ihci'c wlvc iki ikw contrihiitions to it and Ww hur-l'Mi IVII iipoi i ronstaiitiv ank and that ii) casi' of failnic slocklioldiTs wtTc to he liahk' for an amount c(|ual to tlicir hnhh'n^^s of stork. It furth(r j)r()\i{lcd tiiat no siucial t-hai-ieivs. such as those under v.hicli the safety fund haid this and otli(r defects had In n c(iir,(|,d hut the s\ stem had already rcc<'i\r(| its dtath hl.iw. Had the dcd'ccts Ih.h corrected carlitr it is jMohahlc that the hond deposit plan wnnid ni\< !• iia'-c hct ii .•idMpIrd, The chill' inthiences whi'/h i((l to tlu hond deposit law of IH.'JH ware puliiical. Cliaitf rs iiiidi r the safetv tund pian had hi( n Loaiited laily h\ spreial act of tlu IllS'lOin Oi' HANKINC nei l('uisl;iture, and tlitre was a pronounced sciitiMicnt fur lire hanUin'J'. The \\v\\ systiin, howcx ti'. ini^^lit lia\c h((ii t'stahlished nndt'i- the sal'ety t'nnd plan had that Ikcii workin**- smoothly. i.'yJ. Free hdiih'iii^- ■s//.stcin.~-'l'\H' Vwv Hankin<4' Law aiithoi'i/ed any })t.'i'S()n or association of persons to rn'ci\c circnl.-itin^' notes to l)e signed and issued as iiioiuy who wonhl deposit with the couijitroller the stocks oC the Cnited States, of the State of New N'oi'k III' othei' ip[)roved states, or inort<4'ages secnred hy real estate worth twice the amount of the moi'toaox'. 'I'his tl( posit of collatei-al was intended to insure the note lioldei' against loss. \o pro\ision for actual i-edemp- tioii in sj)ecie was ri'ipiired. Anyone wjio j)ossessed the necessary securities uii^ht enter the ha.nkinn' husi- iitss. and it is e\ident that many of them did. ()\cr \'M Ml w haidcs w(i"e orn'ani/ed before IHM). I'ailures i|iiickly resulted, and it was found that in many cases tli( securities de]tosited weit not sutlicieut to meet the ni)t( s. Heal estate iiiort^a^es. howe\( i \ aluahle. wi're iMii (|uick assets, heuce the law was tiually chanyed so that only the stocks of the I'nited .States and of' New ^ iii'k were a\ailal)le for deposit. The notes cii-culated at first at considerahle discount liiil this was o\(r(dnie to a certain extt nt in ISK) hv .III amendmer.t to tin' law \' hich necessitated redenip- tmii of the notes of' itderior hanks in New ^'(ll■k and .\lli;ni\ at a discdimt not yreater than onedialf of i pi r 11 lit. This, howe\(i-. >4a\c an advanlaLif to the cdiui- ti\ hanker hecause ol the profit he could make li\ loan- \iiiX his uoles at j»ai' and I'edeemnii^ them at a discoinit. Hence many persons iti the cities issued tlu ii' notes in till- rw >iiiif r\' towns I'ne nllslnl'.v^s iit tiicv/' li-iiil.^ »\ mc U Iv U) issue notes. r ley had no pirmaiiint hanking ;jfi^ M()M:V AM) HA\KI.\(. f I i ' !i houses, and irceivcd no deposits. In IHil lis condi- tioii was soniculiat bettered hy a law re({uii-iiiM- hanks of issue to become banks of deposit as well, but it was never earefully enforced. Tiic edfeet of these varimis ainendmenls. jiowever. and ol' the constitution of is.'ji; was to improve yreatly the condition of the issuing' banks, so that failures after 1 S.K) were infre(juent and in almost all cases the notes were redeemed at \rd\\ After 18(iU there weix- no failures which resulted in loss to note holdei's. This system was co])ie(l by Illinois. Indiana, and \Vis- consin but with disastrous I'esrdts. In none of tluse states did the system siu'vive lon^- (.nou^h to becoiiu' ])erfecte(l. In Illinois particularly a lar<^e amount of the securities deposited were those of the Southern States, which l)e( ame valueless at the outbreak of llic war. The bank currency circulated at ^r'^at disccuiits. varyin^j!' \^idi the reputation of the issuin*^- bank, in 1H.")7 Iherc wire 112 banks in Illinois: in 18(11 ouly 7. and tin nott' holders had realized less tiian 40 cents on the dollar. The oidy advaiita^^-e of this system over that of tin safely fund is security, which was pi'owd b\- the e\- |)erieMcc of New \ ovk after the list of acceptable stiu'ks had bi'cn i-esti'ictcd to those of the ( 'nitcd States and nl X( \\ \ ork. No cui'ieiicy could be nH)re secure, thai is. more ccriain of ultimate red( ui|)t ion. This, how ever, is rml tlu' only desideratum of a credit cuir-enev (urrt (il redi nipliou is as Important as idlimale ?-edein|> tion. and in Ibis the system is defective. Moreoxer, tin system was rii^id when the binks deposited secui'itie>> they were ^i\en the i i^ht |n issue so mauv notes, ami thl'V could not Issue .'iddlt !ori;d. '! >!!e>U> >! -. >><> >!!.'>ne!' <.<.!>:!! till' n( ((Is of busiuess mi^-ht be. hi oilier woi'ds. tin iiisroin oi ir\\KiN(, am s\nI(Iii \v;is iiulastic, ;in nttrilmt'' wliicli aloiin' with that lit Mcurily it Iiaiuled down to oiii' ])r(Sfnt ('urix'iicy s\st(iii and against wliich most of tin attai-ks of to-day aif dirt'ctcd. [.y.i. I'!.r/)( rit iici' ill (ithcr slnh's. — Tlic liistoi-y ot' i,;itil\S III which the xai'ioiis states wci'c jiart ownci's was. ill the main, (hsastroiis. IvcntiicUx' tricil the ( xpci'iiiKiit \\\ ISOC and a,L!'ain in 1S2(). Ahdiama in IS'JO snh- Miihfd two-lii'lhs of th(- capital oi' the Hank oi' Aiiliama. issuini.'; bonds in i)a\iiiciit. 'I'lic oriuinal l^^t^i(•tions on loans \\('re ample hui tliiy wci'c con- -tniitly \ iojatcd. Loans wxvv tVccly made to memhers dl' tliL" le^islatiu'c and tlicii- fiieiids. and in ten years tli( disconnts increased iVom S,)()(».()0() to S-jO.ooo.ooo. fill panic of I H.'}7 found a la!\ne auiount o|' these loans wMidiless. and coutidence in the notes disappeaivd. to Ih follov'-ed hy a period of business sta!4'natioti. In ist.*) the chai'ter expired and was not rencwecf Mis- NisMppi. Ai'kansas, 1-dorida. and Louisiana had similar ( Apt |-ii'nces. The I iiion liank of Louisiana was estali- li-iM (1 in IH.'}-J with a capital of S?. (»()().(»()() laised by a ■ i!' ot' state bonds. It failed ten yeais later, and was !'i|!ii\\cd by the establishment of |)ri\ale banks undei- M'Miid laws. Missouri's e\pcri(tice was not so calam- ilmis. althou/^ii the Hank of Missouri w is ne\cr a n'l'eat Mireess. The state's connection with it was sexcred 11 iSdti. i."it-. Iiidiiiiifi (111(1 Ohio. '\'\\r Hank of hidiana was til' most successful. It w as ineoi pnrnted m | ,s:{ | with a .:ipital of SI.COO.OOO. one-lia!l' ol whii'li was siibsciibi d i>\ die state. It \wis ;4i\ en a uioiiupdU of banking; in the st.itc and the riLiiit to e^iabhsh iMancJies. |'',a<'li bi-ancli II II I .1 . : : 1 I .111 %\ i.l i' - '*!.! , I 1 M ' I « » 'I I I » I t I • I I » i v" iSSi iC » i ' i ii M V 'I \"\ (i S f( lrii'U'l\cd in polities, their failure was u-enerally due to defects d or^ani/ation and niaiiayeiiient. ft V\ i., If CIIArTEll XXV NATIONAL BANKING SYSTEM* I.")."). '/'//(• XdtioiKtl Bank Act. 'l\\v cstaljlislinieiit :)t' ;iic iiniioii.tl haiikiiin- system was the result of the un- siitist';{ct()i'\ liiianeial coiKh'tioiis which ohtained (liii-iii<) tl'' ('i\ I! War. The enri'eiiev ni' the eouiitry was eoiii- j)ovc(i hir<^X'ly of the notes of over 1, .'>()() state hanks. .-! lai'yc amount of whieli was worthless and almost all I \Uiieh eireulated oidy at a (hseonnt wIumi it was at a ii^lanee from its place of redemption. In addition to (Ills ein-rencv troul)le the fiscal situation oi' the o-overn- i.'itiit was unsatisfactory. It had heen forced hecause cf tile ahseiiee of a market for its iionds to raisi.' moiiev ii\ ilie issue of leu'al tendei' notes. These notes, not Ik iiin. iiiul tUlHiciif irati ( i !)v ;i I'oiiiiiKiii aiil linni \ ; ^i('(ui(l, tlir rrdrnijif inn of tli('s(> ii(itr> 1)\ the a^-(U'iation> aiui m^titutioii^ In \vlilch llicv niav ill' (Irin I rid for i>>ur. and, iliiiil. the .-ccuntx of lliat n (Icmnt ion liv till' pli'd^'c of 1 nitrd Statr^ stocks, and an adniuali pro- ' ■ Mn of - MCI'K . In tlii- pl.m the pi oplr in llicir ordinary iiu^inc^^ uonld tind til'' id\anta;;(^ ol" unil'inniil \ in cnrri nc\ ; of iitnt'oi'init \ in se- i > . oi ciiriinai --a i ' :,;iia i i i. li riinii!:! >al fj,;ilar(i i> no>».it)ii_', ■ lii'.v Ft"l lal i{i'-.(r\.' All in ApiKUilix. 365 ii!* h' III! 'i(]{i •l!4'.lili^t lit AfOMV AM) 1{.\\KI\(; lipnriati,,,,. ,.,|m1 uC prot.rf I,.ii fnnii Iu.>r, ii, dixT.nnts ami , Ncl,;,,!-,--: ulnl,. l,, fl,,. ,,,HrMt I,mi^ of flic (iovmnrn'rit. tlio I'"..,, I,. u,,„!,l fiiul tl,r nirllHT ;„lvanta-.vs ..j' ,-i laiir,. ,K„,an.l for ;4n\rin,,iMit Mvunlic,,. and of incivas-.l facilities for ohtainin- IJk loan- n i|nirv(l liv the \^nr. ^ t.)<;. MarLcl /.,/■ ri/ilcd ShiUs Ixnids. 'Ihv rind I'eahirc of fl,, piaii uas the rc(iuir(HK'nt tliat all hanks \vhich IKT cent of their hon.l deposit. Thus these notes "ould l)e unirorm heeause they were all to he printed hy the government: and they would always he seeurc heeause the deposited honds wvvv pledo-ed" to tlieir re- •Icmi-iion. l-'urthermore. a new demand Tor n;nyvvu- ment honds would result whieli would greatly I'aeilitatc the nation s hori'owino- power, (•.";7. J'Jarffi liisinru ,,f I he r/e/.~This i)]an was reeoiii- nundid hy See-etary Chase as early as IHCI l)ut it wa , nut until l.S(;;j that it heeame a law. It did not. how- t.\cr. result in as or.al a henetit to the national finanecs i:s had heen expected. 'I'here was a decided i)rejudiee .(.^ainst the issue of notes secured hy the deposit of honds. the result (.C the laHiu-e of Ihe several state svs- tems uhich o.H rated on that plan. Furthermore, the original act was del\cti\f m many respects. 'Die state l)anks. a majority ot which had heen e.\i)ected to incor- l)orate under the new law. did not do so in any lar.oc iiumhers: l!,<,rlore there was no great demand for gov- ernment !"i!|(|s. In IS(H the law was amended making the conditions of iruori)orati.,n somewhat more attractive, hut it was not unid ISO.-,, wlun a law was passed providinu' for a tax ol 1(1 per cent on ;d| notes issued hv slate hank-, \i\ NA'iioNAL B.\xi\i\(; s^s■l■I,^r rccdiii- it \\;i , . how- judicc )sit of te svs- T. the ■ state inciir- !;ii-l;c iitidiis i \\;!s for ;i tit.it (•(tdvcrsioii of state into national hanks bccanie -1 IK lal. IJy tliis jM-oN ision all slate hanks which wished 1(1 list' notes wei-e I'oi-ced into the new system. Thus the (itiiiand for honds did not eonie until the war was over ami tlu' neeessily of their innncdiate sale had disap- iKai'ed. Tliis national hank law. its o|)erations i)erl'ected hy \aii^()(h\ character tlu' coiiiplroUcr must !»(,• satisfied. T'if'ty |)er eetit of the eai)ital must Ik- j)ai(l ill hel'ore the hank ecuhl open. aii and .-)().()()(). sioo.OOO: and for th(»se greater tlian -lO.OOO, IvK'h hank must ha\e a hoard oi' directors of not less than five memhers, eaeh of w Iioni must own ten shares of stock. The stockhohlers were in(h\i(hially hahle for all ohl'o'atioiis of the l»ank up to an amount ef]ual to their holding's of stock. In case of failure they could i»e assessed to pay de])osits. 'I'he technical powers of national iiaiiks ha\e already heen considered. Hrietly they wei-e: (1) To receive de])osIts. (2) issue notes. ( .'} ) loan credit on personal security, and ( ti discount notes and other evidences of debt. A hank mij^ht own only such n A estate as was necessary for conducting its business and as came into its possession in settlement of ]>i'e\'iously contracted debts. In the latter ease it must lu- sold withiji li\'i years. The bank ecuhl not loan more than one-tenth of its ca])ital and suri)lus to one individual or cor])oration. Hefore a national bank could open it must deposit with till- Fnited States 'l'reasu>-y a cei'tain amount of U'overnmeiit bonds. This amount Aaricd with the ca])i- tall/ation of the bank, l-'oi- banks with a capital of $•200. ()()() or less, the j'eijuii-ement was one-!'ourth of its capital: for those over S-JOO.OOO it was S.io.OOO. This amount must be deposited re<4ardiess of whether the liank expected to issue notes. It was entitled, however. if it so desired, to receive froivi the comptroller circulat- XATIUNAL ]1ANK1.\G SVSTKM 369 = ii\ iim notes ccjual in ainotiiil to the pai- value of tlic df- |iM>ik(l l)oii(ls. These notes weie "reeeixahle at par in ;ill parts ol' the I'nited States in payment of all taxes and exeises, and all other dues to the I'nited States ( \cei)t duties on imports; and also tor all salai'ies and ntliir debts and demands owiny hy the I'nited States In individuals. e()r})orati()ns and assoeiations within the I iiilcd States exeept interest on tlie puhlie deht. " Tlii'y wn'e also le^al tender in payment ol' any debts to national hanks. ft'>(). Circiildtiii;/ notes.- — The notes nnist he redeemed (in demand in lawful nioney at the eounter of the issu- ini; i)aid<: and to fui'thei- faeilitate re(lemj)tion each hank \\a>> re(|uire(l to deposit witli the 'I'leasui'y an amount ( i|iial to .) per eent of its outstanding' eireulation. When ndtcs were presented to the - that not tiinie than $0.0()().()()() ol' national bank notes must be rt tired in any one month. The notes were subject to ta\afion by the ^oveiiiment. When they were secured liy the 2 per cent bonds, the banks nnist pay one-half of I per cent annually on the average circulation: when stciired by higher rate bonds the tax was 1 per cent iinnMally. 'I'jie expense of redem))t!on was also l)ornc lie banks. It is estimated that it amounted to about "'''•■{ for each $1 ()().()()() of ciiculation. There were in 1!M)'.). ('»,«<*:{ national banks, with a ti'i.il note circulation of •S<;4H. ()!)(•. 2 10. To secure this *; (Illation the baid..'{H!).r)l() of <>()veriiiiicnt bonds. A majority of tlitsr bonds ijorc only 2 ])tr cent inttr(st, the lowest rate paid by any nation in the worhl. Tims the predietion tliat the hiw wouhl ereate a market for government bonds has been fulfilled. The sreond reasdn for its adoption — that it would provide a uini'orm cur- reney — has likewise been aeeom|)lishe(l. for national bank notes have always eireulated freely and withoiil diseount. The note of the Maine bank was e<|ually aeeej)table in California as that of the San Franei^co bank. The danger of the system lay in the priee that was ])aid for these benefits. In making the eurrcncy stable and uniform it was made inflexible: and in re(|uiriii^ a it> j I!). 100.(1(1(1 ,;,!).);5.t(>l..V.l Niitcs 171,()()(),o()o 7ii.\i:,,u-Zi W liile national hanks had inncased four aii<.S. 000. ()()().()()() of dci)osits in state ''.inks which issued no nous whatever, W'v have seen that this deposit system <4a\e rise to the most perfect cui'reney known, a eurrincy which ])er- tiiinis a vast amount of money work at a minimum cost .111(1 which exi)aii(ls and contracts duriiiu ordinarv times Hilh the \ai'yino' needs of l)usiness. To this function tli( naiional hanking law eomplctdy suIk .dinated the i^siR' of notes. It j>iin- >w. ..--.n 4-,. , J ,,.... i, ;{7i I ' -fi 1 I I I Kt I II V KV 'f . '''- .AIOMA AM) H.WKINC; and (lifffrciicc between notes and (iej/osits. Hotli are (leiiiand ohiioations of the hank. The (hirerenee is ehiefiy one of form whieh oiv,s to the note oRattr aeeeptahihly hteanse (.f its nni rorniity. Tlie person who aeeepts the hank note rehes entirely npon the sta- hdity of the hank, whereas one who aeeei>ts a cheek rehVs npon the personal ercdit of the maker. The eonrts jiave held that the tender of a cheek does not eonstitnl.' payinetit nntil the cheek Itself is redeemed at the hank. pro\ ich'd redemption i^ re(|nestea within a reasonahle time. It is ol)\ ions, therefore, that the ru.te l)erforms a fmietion which the deposit eamiot i>erforni. namely, eircniation heyond the repntation of tlu' oriuinal holder oi' thi' hank cre.lii. U\:i. Liniil'ilinii nf ,lt i,n.sil r//m'//r//.--Tliere are ])arts (,f the conntry. particniarly the nn-al districts iA th. Sonth an. I West, where hankinw^ facilities are poor and where they ninsf nse -ither notes or actnal money. Furthermore, at certain times o!' the year their demaiid for enrreney of ,,ne form or another incixases. It is ohvionsjy p.,.)r economy to force these districts to nse ,U«>ld in their hand-to-hand transactions wluri tliat ,ii.ild ean perform three tinus the mone \ w.,ik if h■ "' l-anahh. IuihIs hy enahhn- the eitv hanker to 1"^"' I" tl'" larne ecnters the .leposit. of the eountrv "ank. Ihese needs eontinncl to exist Iron, vear t'o ><■<•"•. hnt the h,anit!u hy thr city hanker of th.' eonntrv I'anker s ,|,j,os,ts was s.. oreatly ahusc.l that its (hm-vr's fHeanir as oi^al as its hrtietits. " UH. SrasoNa/ '■ '•■•'II- As the only liehl lor this sort of loan is "' "'•■ ^*'"'^ '"•"■l^"^- »•'*■ |""n.olH.n of sp eirculatinnnir,|iiininfn,.nrral aeeeptahiht v. If, r,. ^^■•'sa .l,„,and. th,r, loiv. that iin.ler a svst, ni .d' elastic 'i<»te issu, ,,.u|,| hr linan,',,| w,tli,.ut shipni,„t ,.f i,n,ld, a conscciu, lit ,1, phlM.n of r, s, r\ , s an.l ,'allin.j ,.f |,Tans. Perhaps it is u.|| t|,,,t ,,nd, r th,- svst, 111 ,,f r,s,,v,i 'I'P'.Mts th.iv was lhis,-h,,k up,.n speculation, hut the 1 1 1 1 1 I ^ ) I I V I I , \ t \ •y (•naiiiuiL; iii, eountrv I'ank, r to increase his ,,un ,-urr, ii,-y supply, uijl hsseii Mi '4 .'571 MONEY AXn BAXKIXC ''J the necessity of kcepin- easi, l.alanees in the cities. Tliiv \^<'"l '•'" '•••".kers. yet ,t is the countrv hanks then.- •sdves uhich ucre the first to uithdraw deposits. Kach ''ank was anxious to increase the cash reserve in its own vanlts. and tins could he done onlv at the expense oi' v-n.e other hank. As reserves were depicted, loans n.ust 'KM-a leol(l ill the markets of the worhl. ()l)vioii.sly, however, this metliod is extremely slow and very likely to l)e expensive, as it may involve the sale oi' ^ood eol- lateral at saei'iHee pi'iees. 4»;»;. Alilrich-rrcilaiid Aci.'V\w Aldrieh-\'reeland Ael of I <»()«, adal tender money with I hi' Treasurer of the I'nited States. KIT. Iinldsticitji. Although the a^' to ixpand wjieti nec-essary but the pouci- to contract automatically when the necissit\ for ixpansion is removed. In neither respect did the na- tional bank no' s meet this need. 'I'hc re(|uirement that bonds must be purchased, and deposited in ;idvanci', made the procediue s(» slow tjiat oftentimes the notes • niiid not be issued until the deinand for them had dis- appiar-ed. Confi'action was excn si .wer because of the restriction tb;it oni\ .so oiui itiwi ii. tli ■■,.. .•,. , i.i be retired in an\- oni' month. O ■» /> ^H'^■|:^ and haxkixo 1'.^^ \\.i ¥- [VV ol 4<>H. !-lvp,u,si(>,i of haul: circn/alioN. As a matt, fiict the auH,u„t ..r iH.tcs cutstandmn varic.l not at" al. w.thtiK- husmess lurds of tl.r cuntrv luit cnti.rlv with tl'*' Pncv ..r -ovrrnnirnt h.,n.ls. Cpon this hitter and "P"" tlir nn-rcni c-on.URrcial rate „r intnrst drpc-nded thr pro/It to hr w.ulv out ..f rimihition. W'lu'ii honds ^vvn■ln^v thnr uas a trn.hncy toward janvhasin- then, ;'" pn.fiK ;„ nm,latH,M iMc.va.. ■., t> in hun.is at the av..,-ao. ,„o„,, "-'■l^'t .-at.., l.nt ,flt takes out nn.ulat„.,< it .an onlv loan an •'"""'"■'' "inal to the par value of the hun(l> an.l io.es the interest Ol, the pre,mu,n. '''•'<■ I'i^Iht the tnark.t rate of interest the ..reater "••IS th,. loss on tins pren.inni. hence a smaller protit "" ^•"•^••''••'ti"M. Inasnineh as the rale ,d' interest in- '■nases w,tl, inereasrd dmiand lor n,o,H v. the proljt on *■'""''■""""'"''"'"' "''^"••""Mcnase or notes was most ":"'';■''•. ''''"■ 'I' l'< 'iden.-e or fh, a.«Teu.al. .n>o„nt of *■"•'•"';"'"" "I-i th.s, hvo induenees was n. ver more ••'""l'''l. Ldcl. of unit// in flic .sf/stcni.— lw addition to the T.OOO national hanks tlure were a -^reat many more state hanks and trust eom|)anies. which weri not onlv direct (•om|)etitors of the national lianks hut which were <>ov- ■viwil hy diUVreiit laws and i-eoujations. 'I'he result was ili\iously a nKchanism with I."), 000 managers, each in- terested in the welfare of his own institution. A system was needed wjiieh would enable the banks to work in unison instead of at cross purj)oses with each other and which would render possible the issue and redemption of notes as the need i\>y them mi,uht appear and |)ass. iTO. S'(>-inanfs. and their atl'airs are adminisleicd 1 i- 1 •! ■ I 1 11' •••__• • • ■ ■\ iiifFi wi aoiiiiV rtFiii jiiiiiiiC S]>n"il \Vilo stTXC Wltjiout compensation. Tn the West practically all tin savinus i .',8 r-i*• ^i "Kiltiple thereof is the smallest sum that mav 'H' deposite.l witl, the post oUiee. hut postal savin.."s stamps at t.„ eents may he pmrhase.l. Interest at the rat., ol -J p,.,. c.,,„t per annum is paid on these .ieposits •Vxleposdor is aUowed to have more than five hundred 'l'»llars. e\elusi\ e of interest, to his eredit. 7''^' '■""'''^ rceeived are directed t.. he deposited in sohent hanks, statr or national. Xo one hank mav have """■^■"'''" '!'<• amount of its capital stock and one-half 'tynrplus. Inteivst of at least 214 p^''- cent per anmim IS to lie paid. The trustees may piiirliase .uovernnieiit iionds with part ..f thes,. p,,slai savin-s lunds. hut n..t more than •^" !"■'• ^''''t may he used in this wav. for ,| ,s inten per eent on deposit ^;'»l' I.. vvr vm^ per- annum. " ' PHi:si:\'l' (ONDI'l'IoNS Oi' HANKINd ;ST!) 'I'lii- jjostal saviii^ys t'niids aiv to he ke|)t ^rparatr lioni the other postal rcrcii)t.s and arr ijrottrtcci hy all llir laws already dealili.u' with piihlit- inonrys. The faith ol the Fiiitc'd States is pledged for their safety. It is j)rohal)le that the est.ihlishmeiit of postal sa\ - iti,y:s hanks will hriiio- out of hi(liii,>f enough to pay the depositors of all insoUcnt hanks. In this way confidence in the hanks would Ite implicit and tluy would not hecome suhject to "i-inis." The j)lan has heen viudi-oiisly attackid. howcxer. h\- llic hanks. 'I'heir position is siihsiant iall\- that the sys- tem would place a j)remium upon incompetent and dis- iionesl o.-tnkini;. and uikici- presi tii conditions ijiri'e is little doiilit of the coi'reclness of the contention. 'I'lio m m ".t ■i i ^HO MONKV AM) |{ANKI\, stroiio- l.anlv niust be taxed td ■'''1<^'I ''aiik. and at the same I t I ye that pay httle attent I't^'siilts rrom its stn ii-^th. I) I'uy the (lepositc, , ,if' the inie it would lose the |)r(s- epositors would <»l a hail tl k. h '"" "iider sueh a system to the stahili! Dan! leeaiise their deposit Hy minht select. Tj '•^■^■Hy l)y the iiidueements ottered hv tl s would he secure in ai H'V W,)ul(l I) i\- and it won '" ^pite of strict Id i)c ver y ditfieult to kfep tl without the knowledoc of the auth rc'^Milation of these iifd .y'n-ci'ne<| le various hanks. iieenients icm from hein^f uukK "ic i-esu It orities. w ""'i".H' t'xamina- are |)oss!hle. And it has I y it such examinat ions eoimtry that tli '"ily to lia\c the insoh ent I'or vear "■cii [hv experience of tli iti cs w ho ha\ •"■'.V true it a national svst <^y ii'v not. Many hanks have failed receivers discover that tliev have I s uithout the knowlcdoe of the autl lis Would l)c pai't e examined th )een lor em. Tl leu- <-"l'»pled tocoNir l.j.ooo hank em ot u-iiarantce wen eonditioi IS. Whell i|)eratino- under different itr or not elfectiv JK'ssihle III a sinnle state where hank t' examination i« uniform will I and upon the effect >c seen in the experiei "t,U' eonditioi IS are ice ol Ol lat K'M depends tl iveness of the examinat i-omoters to inance tiieii- proposition in New \'ork. Capitalists w ! th funds for investment and an enterjirise needin' those funds are l)rou^ht together hv the financial insti lutions of Wall Street. The husin less of hrin^'in^- tl le apitaJists and the enter])rise toj^'cther is wi-v compli- ated and may re(iuire a lon^- time. In fact, a lar xv p|-0])01'tlOIl o f tl le seem-ities Hoated in Wall Street n main there in the hands of the promotei's. When a coi-poiation wishes to raise capital it may issue either stocks oi- uonds. In oi-dei- to dispose of its ^tock^ s and t)on(is d 1 to tl le capitalists it is necessarv that market he made for iiiem. When the rnited States Steel Corporation was or<4ani/.ed in r.»()l the prohlem of disposin;^' of the \ast amount of stocks of that cor- poration \\as an e\c'eedin,ul\- I'ormidaMc one. The task >f i, ttin iR' slirewi the lest piililie intercNti- as ( ntrusle d t (i lo one ol siocK markit mam|)ulators on tlie ^'x- clian,i""nient when they reach the ultimate investor "lio puis them au the income w jiich tl \e oi ly III his strono- hox f,,,- the sal' K'>- eain. ie(|nires the use of circulat- ing' capital, just as a merchant handliiii.- d ,11(1 ry «4-oods must pnn i,lc suttieieiif capital to carry liis stock of o„od an averanc of fn.m three t .s on 47 i. Jt'orh o six months niidd // ■sffiiritics. — Tl 10 emen w ///,;'■ cd/'itfil of (/((ilcr.s i I'" <'arry the securities in Wall Street he- ("iv they reach the ultimate investor need in their Inisi- 11' ss enormous sums of temporary capital. These mid- <'l^"ieu are the hon<| houses and the speculators. The ^•aj)ital re,|uired is laroely furnished hv hanks, nearly all '.'*' '^ '" »'"• !■'"■•" -r hank .-rclit. The corporations which issue le secui-ities are paid for them |)ass into the hands of the middl as soon as the\' emeu. Tl le middleman le cor will prohahly pay (or them with a check which tl l""-*'t'"" <-"i deposit au.l a|.'ainst which it can draw its own checks in niakiiin- payments: these checks drawn hy the corporation are prohahly deposited airaiu, and so on "Klcfimtely^ This hankcrecht whici cii\es for its issues of 1 the corj)oration re- tl Heeds Tl IC middlemen. (>itlier hond 1 louses or speculators. who purchase the securities, horrow the hulk of th.i' haul credit tluy re.)uire from the hanks. The hanks makin^r ■I ^Pyi'iHy.f loanino. credit for this purpose arc known I'iie credit loaned l\'.,!l 'I iiii.tfKiai iianivs. o the speculators or hond I louses IS I), :ised on coll.itei securities serves the purjKJse of I '^' forporation in producing' whatever capital n,,„ds it HI I.ATION OF n.WKS 'I'O WAI.I. STUKKT ;5S: )li\- M'c.inty. Tliis collateral scrunty is the .same slocks and IioikIs wliieli the credit paid ('op. 47.3. Dclail.s (,f the collalcr/il loan. Wv have (hs- eiissed, in tiie chapter on loans, the natnre of the collat- eral or call loan. The vohinie or amount of this partien- lar husincss is so enormous that it is worth while to ex- amine more closely its details. Sni)i)ose. Tor example, that a si)ecnlator hnys 100 shares of Cnion lacific com- mon stock at 11>.). This ((notation means that the 100 shares of I'nion Tacitic stock are worth lO.") |)er cent of par. which is nearly always .<<100. Therefore the 100 shares will cost the speculator .Sr.>..>0(). The stock will he purchased thron<.h the hroker. and if the jjurchaser is a speculator and not an investor it is (juite likely it will he purchased "on mar<^i?i.'" The customer deposits with the hroker from 10 per cent to 20 per cent of the value of the stock in order to j)rotect the hroker a-^ainst any loss should the value decline. The rules of tiie New \'ork Stock Kxchanne re(|uire tliat every jjurchase and sale must he hona tide and that actual delivery of the stock must he made. The hroker IS not in possession of enonoh eai)ital to })ay for the stocks i)urchase(l on mar^-in hy his customers and must i-o to the hank for accommodation. The hroker pays for the shares hy drawin^r a check on the hank with w hich he is in the hahit of doino- husiness, and hy having- it certified. The hank Mill loan on collateral like i 'nion Pacific prohahly HO per cent of its market value, which wives the hank a mar^'in of 20 pcv cent in ease there is .1 hreak in the j)rice. The halanee of the purchase price IS made uj) hy the marnii, ,,f the customer and the capital of the hroker. 1T<'>. ('irti/iratian. ]{ is (juite likely that at the time tile hroker asks for the certification of th( cheek he has :584 .M()M:V AM) n.\NKIN(i 1V~ not siilliciciit CiMids in till' hank td vinvw nor can lir liypotlKcatf the stock until hv lias paid for it. The l)ank. Iiow.vcr, readily (rrtifR's the cluck. diiHaidin^r npon the receipt of the collateral and the oiantin(). OOO.OOO. 477. Restrictions on colhitcral.—Mos 'he l)aiiks are veluctant to take too much of any one setunty as col- lateral, and it may he necessary for the broker'to have several . ..nk conneciions so that he (•.•!•) (hM;ihrle the shares amono- them. Csually the hanks will not take uuhistrial shares alone hut reijuire an admixture of rail- road shares. I-'urthcrmore. only those securities which have a ready market will hf used as collateral on demand loans. trs. Call loan /Y//r.— The rate of interest char^-ed on these demand 1; •nis is excecdinu-ly variaf.le, running- all the way from 1 per cent to IHC per cent per annum. I f durin<>- the course oi' the loan there should he a sharp advaner m iiiuiiey rates tiie i»orro\\er is notified that the rate charged will he advanced. If the broker oi)jects RKI.ATIOX OF UAXKS '1 O WALL srUKF/r ;585 I tt. the advance lie is at liheity to pay the loan and seek .urornniodatioii elsewhere. Conversely, if the rate ^oes down he may elaiin a rcduetion from the hank. 470. UcsponsihUUics of the Inau clcrh.^ All eollateral loans are in eharne „f' a loan elerk. In the ^reat Wall Street hanks this is a most responsihle i;osition rerinirin^r keen and constant vin-ijanee. The loan elerk must keep a sharj) watch of the market and he HiUst kru)w what the money market is doin^r. Uc must keep an eye con- stantly ,,M the ticker (as the instrument for reportin^r (|Uotations of securities is called), in order to see tha't tlie margin of all the collateral loans of which he has ("har^x-e, is properly kept. \\^ there is a sud.K-n slump m the market, if the value of a collateral ^roes down and the mar^nn is not maintained, he sends immediate notice to the horrower for more collateral. There are certain i)eriods when the investors ha\e A^nne out in the market and paid for a laro-e pro- portion of the securities. Such was the case ?n ]H!)7 hefore the hoom ])er/Ve.v.— The credit which tlie financial l)ankers of Wall Street extend to the dealers and speeul. 'm's iu securities is based upon cash reserves. Tb" National Hank Act. bv permittin^r the interior hw,^ .,, deposit half or tbree-tiftiis of their cash in the res»-rve c;\v banks and still count it as re- serve, cncourarscrvcs.~i)n. of the authors has elsewhere made the sn,.xest,on that the danuer of pynnrnMing u.ight he ■•"•«vly el.nunated hy dividino (he hanks in \ew York ^ ily into lu<. elasses, eommereiaj and tinaneial (■"n.mereial hanks furnish eredit to merchants and "lanulaeturers to he us.. i in tne production and M.ove- ""''* '•' -'""'^^ "'<■ '■'"^'"^•i^'l '•••"iks furnish credit to '"•nkers and dealers to h^. us.,! i„ purehasino. ,nd hold- -ig scurdies uhich ar,. dcp.,s,t,,l as collateral for the '"""s. "■^■•I'sfin.i-ulslnnn. feature of the tinaneial hank - I.e collateral loan. This fa.-t su...vsts a plan lor -Ntnctu.u. th, resources of the speculator without at "le san., time placing- any hurdcn upon inu'.,strv an.l loniuicrcc. ^H.^ Cnnnncrckl hanks.- Let Ih,. national hanks in the t M-ee central rescr^ e .•ities-\cw V..,k. Chicago, and >'.;nu,s«eduided into the tuo class, ..commercial "Id fuiancial. Leav t., th,- c,,uirn, n-ial n-dio-rd '>-u' 'M ti.e pnvik.ues they ,mw enjoy un.lcr the Xa^'n'^I 'i.ijik Act i.xcept such as h.Tcinafl.r state.h. an,l in ^•wditmn pcnuir ih,,u io ,vcrcise hust cunpanv func- loiis, such as acting as trustee, a.luiinistrator, r(-gislrar. 388 MONEY AND BANKING 1 etc.; also 4' upon an e\chan<4e. \'iolations of this i)rohihition will cause the hank to he classified as a financial hank. ^Hl. Fiiianria! hanhs-.- A financial hank should have the ri^ht to make loans to hrokers ui)on collateral se- curity of stocks and honds or warehouse receipts. How- ever, they should not hi' permitted to receive deposits from any other hank oi- hanker or from any tnist com- ])any. They should not he permitted to issue circula- tion, hut should have the riylit to deal m honds and underwrite issues of honds. Kvery loan made shoidd he posted in a puhlic place and ^Wc the name of the horrower, the amount, the rate of discount, and the name of the security. Xo national hank should deposit any of its funds in any other institution exce|)t a commercial nali(.nal hank in a central reserve city or in a national hank in another city. The forcgoin^r provisions are an attempt to deal with specidation on the hasis of present ha?ikin^r laws. It is to he hoped that in the ruar future all the hanks nt the country may he incorporated and reirulated under one system. l''inancial conditions can ne\ci' he thor- oughly conti'ollt(' nor can I i;...: le speculati\e exj)ansion 1.1 i:i »i.. , i .. I . . -. I i i i K ." and trust companies are made to conform to the re- RELATION OF BANKS lO WALL STREET 38i) (luirements laid down for iiationnl hanks. It is a great anomaly to put strict limitations upon the national hanks and expect them to compete with uiu-epdated trust companies; hence, in the provisions ahove, we have yranted to the commercial national hanks the functions uf trust companies. It were much hetter, though, to ill l)rive the trust companies of hanking functions, which IIrv have accjuired, hy usurpation, until the states recognize them hy statute.' ' Baiiktr'a Mayaziiie, Aug., 1909, |). 19J. 15 AN t'lIAPTKH XXVIII \' I) THK rXITFI) STATKS THF.ASrRY •i8.}. licspousihUitji of llif Scnrfur// of the Trcasurn — Few people have any a(l((|uate idea of the power and responsibility attaeliin^- to the j)osition ol' Seeretary of the Tnited States Tivasnry, This jjouer and respon- sihility uas not eonseioiisly oi\rii io the head of the deparlnient hut exists hy reason of the failure of Con- gress to assume a Iturden and resj)onsihih'ty whieh })rop- erly hilotjus to it. C'on,yress. or. Trciisuvji vdiiscs slrin/'ciidcs. — There is a cer- tain (juantity of currency in the country, consisting of the various govermnent issues and national bank notes. Its amomit can be increased or diminished but slowly. The larger percentage of it lies in the Treasury; part is in the bank vaults serving as the l)asis for credit; the remainder is in the pockets of the people. Should aii\thing ha|)pen to increase the amount in use by the peo|)le, it must come either from the bank reserves or from the Treasur\-: ii' an unusually la'ge amount lions to the Treasury and is not disbursed then tlie amount in the ba!dvliicli may be employed in bank reserves. If the l)ankino- credit of the country is e.\i)an(led to the limit permitted by law and a ])ortion of the reserve funds is suddenly taken away, the banks must contract credit accordinoly. hence the immense importance of the weekly statement of the New York C'learinn- House banks showing the con- dition of their reserve. A contraction of credit means a diminution of |)urcliasing power and a weakening demand for everything that is bought and sold, stock's and bonds being especially sensitive to this inHuence. A sudden withdrawal of cash funds from the Xew York })anks and the immediate contraction of credit which follows when credit is expanded, is likely at any time to l)ecome the initial cause of a panic which might spread outward from Wall Street until it involves 'the whole country. The Secretary of the Treasury is re(iuired to keep in the Treasury or Sub-Treasuries all tlie cash received by the goveriumnt, except the receipts from internal revenue, amounting to about $1.()()0,00() a day, which, beiore the\ arc "covered" into the Treasury," may be deposited in certain banks designated as I'nited States depositories. As security for these the baid\ and linatit-ial lil'e rests upon the t'ouudatioii of easii in the Xew York bank reserves. 'I'iiere are two ways by which this cash reserve nsay be interfered with — by withdrawals and shipments West and South during the autumn season when those sec- tions need an unusual quantity of cash monev; and by the pilino- up of surplus funds in the Treasury, liy whichever manner the funds are withdrawn the effect is the sanie.' 4H7. Defective currcncn larcs. — The condition above outhned is not inevitable but is the unavoidable conse- (|uence of our currency and the treasury laws. We know that the system gives rise to grave dangers which threaten the happiness atid Avell being of every jjcrson in the country. Congress rel'uses to change the law and the law is incapal)le of meeting the conditions as they arise. The bankers of the country, jjarticularly of Xew York, are often loudly blamed because they allow such conditions to arise and exist, but amouL'- so many, who is there to take the responsibilty or with sulficient power to remedy the matter:' The banker is conducting a private business for private gain and there is no reason why he should be expected to assume a pub- lic function of such, magnitude. ^KH. L\r pal it'll Is of tlic .sccirtari/. — The rcsj)onsil)il- ity falls, therefore, upon the Secretary of the Treasury. rie is given specific discretionary powei-s in enforcing the laws and out of these certain exi)edients have been devised which may be used mider certain conditions: 1. The secretary has induced national banks in one way or another to take out notes in advance of their actual needs. 2. lie has anticipated the payment of interest on 'Si-c .\|)iHii,|,\ in •■ iva.r.il |{( scrvp Act." I'li^--. ,)t(! ,/ .v,r/. 394 MONKV AM) HANKING \W^' Tuited States l.onds in order to put casli into cirou- Ja' on. 3. He has made purchases of (^nited States bonds lor the same purpose. ■1. He has made a rulin^r that tlie banks need not keep a reserve a. Dnrlopmcnt of the use of chccks.—Mr. C'onant in his "History of .Modern Hanks of Issue" says: Till' j)r.)lii!iit;r.n upon note issiius was prohnljly one of the causes wliieli i<.iitril)uted to the use of cheeks. Tlic notes issued hv private bankers wnv at fir>t written on paper for auv odd ouiu, like proinibbory note>. I'lie practice was introduced hy EUUOrEAN BANKIN(i SYSTEMS 397 C liild & Co. in 17^9 of liaving tlic notes partly printed :ui(l [>,irt!_v written, like a modern check. These notes continued to he issued till ahout 179.'5, when the existing system was intro- iluci'd. of giving the depositor a credit for the full amount of his ill posit- and authorizing him to ih-aw checks at his convenience a<,rain>t it. 'I'he issue of notes by private bankers was not forbidden until the Hank Act of 1844. but, their use grad'ially diminished as the greater convenience i checks came to be under- stood. The intimate relation between the Bank of England and the government, wliieh had been estabhshed at the outset, continued as time ])assed. The charter was re- newed from time to time, usually on the condition of .idditional loans to the government. The war against Xapoleon was financed largely })y the Bank of Eng- land. Mr. Pitt drawing heavily upon the bank for money which was sent to the Continent to promote the war. These drains of s[)ecie continued unabated until the bank was forced by Parliament to suspend specie ])ay- ment in 1797. The suspension, or restriction as it was railed, continued until IH21. During the earlier })art of this period the Bank of England was able to keep its notes circuLating at par with coin. The act of 1797 had made them legal tender. I'inally. however, depreciation began, and during the h(K)m which followed the panic of 1810 assumed con- siderable proportions. In that year a committee was ap})ointed by Parliament to investigate the fii\ancial and monetary situation, and a report known as the Bullion Re})ort was the result. In this re])ort the real evils of the situation were ably expounded, and recom- mendations made wbieb. if ad.ontcd Dronintlv wonjd jinve restored the currency to a stable value. It served, how- ? { 398 MONEY AND HA\KIN(i ^.. pc,.to.,lu(.atcthcn.in,lsnn.Mnker.snr,cl public- nun ^" :'" -"..kTstar.di,,^. of the prnhlcn.s i„volvc.l, an oIm- oat.oM winch l,„re fVnit a ieu- vcars later. ,,,,'',,;';;:,;''f'7'f;i'^->^'--'A^'^'^'>l.lstan,Ianh ■'^-a.nonnt nl ...M. ,vsnn.,>t,onhc.,.anK. a fact A Hvsan.e tnn. the o-ovcnuncnts pnu.Mo hnn-ou "r^.n, -'-•'< -as n.stnc.te,l so th.t nn nn-ther l,.ans eonl. lH.^.nh^., h.nt special an.hon.y ,Von. I'aH.an.ent. m 1823 .t was (hscovcred that the Hank of En.rl,,,,] haci not been .iver, a monopoly of hankin^r excq,t in Its note issne fnnction. There followe.l aeeonlinolv a movement to establish joint stock banks of deposit .,;;'^' ;fi^fr^^'-^'--'-^swereinm.e:;!: My estabhshcd, bnt it resnlted in certain c-oncessions ^"'-/- I^ankofEn,dand. In 182(> the bank con- sented to the establishment of joint stock banks of issnc. A ';'"; . :; ""'" ""'^^ authorized in London an lucnnty but they were not ,nven the ri^ht of issue. In lH,i,i an act Mas passed by Parliament which made the notes ot the Rank of Kn^huul le^al tender as Ion. as they w-ere hem- redeemed in ^old at the bank. The notes had been le^^al tender prior to this act bnt ordv dnrinn- the restriction period. 491. Bank Act of m4.-Buvir,99 Tl le ration of the banking and issue dcpartnicnts. Iiank was ordered to deposit with the issue dej)artmeiit L 1 !•. ()()(),()()() of ^'•oveniment seeurities, wliich rej)re- M!)tc> the average amount of eireulation then ontstand- inn-. This deposit inehided the ^'•overninent's del)t to the hank, which amounted to €11, 01.), 1 00. In return the I)ank received an eciuivalent anuMint of notes. I'lU'tlier notes couhl he issned only after a dejjosit of L;(ihl coin or hidhon with the issue dei)artmcnt, the riiiht Ml' deposit hein^' ojjcn to anyone. Joint stock hanks .>f issue were allowed to contiinie issuin is inconceivable. The hank act converted it into a ank of England. Xo interest is i)aid on these deposits but the banks continue to make them be- cause of the right it gives them to draw on the city I'anks. The result of this system of concentrating th<« cash ui one bank is to place upon the IJank of Englan.l the responsibility of holding the cash funds of the entire country not in active circulation, ^^'hcn there is an extraordinary demand for any reason, such as with- drawal of deposits by individuals and firms in time of panic, that demand is transmitted from one bank to another until it finally reaches the Bank of England. For this reason the IJank of England must iy John Law in 171(5. Tiie bank was well conceived and tor a time was ably mana^rcd, bnt it finally became involved witii Law's specnk.tive schemes and went into li(inidation in 17'21. The panic which marked the end of Law's career was so severe that for lifty years there was no further att'Mnpt to establish a "^real national l)ank In 1770 the Bank of Commercia! Discount was organized only to receive its death blow at the hands of the government in 1789. During- its i)rief existence ;fr was well managed and gave excellent service. Tiie gnvtrnment, however, found that its own creciit was unstable, and in an effort to repair it dragged the bank down with it. The climax occurred when the gov ,'rn- nient ordered tlu' bank to pay into the Treasury a large sum in notes in return for worthless assignats. In 1703 the bank went into licjuidation. 4".).>. liiuih- of France. — The Bank of France was foutided by Xapoleon in 1800 with a capital of .30,000,- 000 francs. At the outset it had no special nrivileges in regard to the issue of notes, nor was it a government institution in any sense. In 180;j the capital was raised to 45,000,000 francs, and it was given the exclusive right of issue in Paris. In 1H()(; the capital was furtiier incieased 1o !K),000,tOO francs and the present system of government was ado[)ted. I'nder this .system a governor and two deputy gov- ernors an api)ointed by the state. These othcials must l)e stockholders. 'I'liere is also a board of fifteen re- gents chosen by the stockholders, but the governor pre- sides ov(r this board and has general supervision of loans and all bank affaii's. .. »l... ■•:r!-.» -•.*' •i-i' issue in all towns in which it had branches. During 'f '^ El'KOl'KAN BANKING SYSTEMS 403 the years following the fall of Napoleon its influeiiee waned somewhat in favor of the establishment of de- partmental l)ank«,. A laroe nnml)er of these were es- tahhshed between 1830 and 1840 as the resnlt of the !>ehef that the liank of France was not properly or- ■iani'/ed to administer the banking affairs of the average citizen. It was popnlarly beheved to be a bankers' hank. The nnnvtii of the (lei)artmentai banks soon re- sulted in a spirited contest with the IJank of France, the main [joint at issue bein^' whether the privilege oi' note issne should be confined to tlie one bank ^r|isli law ;uid by the National Hank Act V; M lU 404? M0M:V AM) BANKINC; of the I/nited States. The vohnne of notes outstanding is fixed solely by the needs of business and by tlie eash reserves whieh the bank thinks it neeessary to keep to redeem the notes. Under this plan bank notes are treated just as deposits are treated in national banking law — as demand obliuations of the bank against the re- demption of whieh a reasonable eash reserve should be kei)t. In })ractice tiie amount of notes against whieli ati e(iui\alent amount of eash is not held is relatively small. iVIthough the Hank of Franee is not re((uired to {)ro- vide any speeitie reserve it has found it advisable to kee[) a very large one, mueh larger than Me eonsider neeessai-y in this eountry. The reserve of the IJank of Franee will average about 60 per cent of its circulation and consists of gold and silver eo' 408. linniclii'.s.- 'i'he bank is recjuired to maintain one branc'ii in every department in Franee. Each branch is allotted a certain aniount of the capital, and the law re(iuires that half the ca{)ital shall be held locally. The total cai)it:d is at present 1H(),()()(),(K)() francs, or a|)pro\imately S.'}(>, ()()(),()()(). Loans are made by till' branches as well as at the central institution, and at the same I'atc of interest. It is worthy of note that the l)ank oftin loans in very small sums, running down to a few francs. The bank also does a large amomit of re-discounting, the small institutions tlu-oughiiut l-'iancc accc pting paper with the intention ot' passing it on ai a small piolit to the central bank. The liank (y\' I'liglatid issues notes onlv agamst the deposit of gold with the issue deparinu lit ; ilie Hank of I''rance issues them without any restriction whatever except iiiose iiiij)osed i»\ its o\\ n couseix atism. it is evident that tiie latti r nu thod, although it may not ap- F.UHOl'KAN HANKING SYSTEMS 405 pear on its face to be as safe, o-ives to the currency the iinieh needed attribute of elasticity. The Kuulisli sys- tem is notably inelastic. The volume of out^standin^r notes can be increased only by the purchase and deposit <»r <4old, a method both slow and expensive. As we have seen, the rigidity of the system has caused the MTowth of the deposit currency, the l)ank note losing entu-ely its true function as a credit instrument. Eng- l.ind's only resource in time of acute strin«rency is the suspension of the bank act, which in itself is an" admis- sion that the system is incorrect in principle. Jn France unrestricted issue has allowed the bank note to retain its true character and its im])ortance as a medium of exchano-e. The system is elastic, the vohnne of the (iieulat.on ex])andinu- juid contractin^r as the demand for it changes. Although there are no reserve recpiire- nients the same result has been accomplished by con- ^eI•vative numagement, so that the note of the Hank of I'lanee has Ijcconie as readily acceptabk- as the liank «•!' Kngland's gold certificate. The law fixes a maxi- mum limit to the circulation of the Hank of France, liut this is changed from time to time so that it always ex- ceeds any j)ossible need. The (|uestion as to which is the betfir system, Imw- cver, camiof be considered here because it goes far Ixyond the merits of the two j)Ians of note issue. In Imal analysis it would be foimd to de|)end uj)on which s\stem that of perfornniig exclangis with bank notes i'V with the deposit currency -would be most economical .■mil best suited to the needs of a given country. Even lliin final (hrision of the question must be largelv of aradenu'c value, for the century-h)ng habits of nations ^ cl« I I I > \ I l€l I I J; t 1 I , \ KrioV\ iftim- oj ijic uruier in si lying principles, however, setting forth the t \\t» li reat 4()() MONEY AND BANKING r-'. f? schools of hankiIl^^ is extremely valuable to anyone who is interested in the unsettled hanking- problems of the I.^nited States. France and Kn^land have each ^iven to the world s})len(li(l examples of conservative, upright banking which stand as monuments to the ability of their citizens to conduct private enterprises in the inter- ests of the pu])lic welfare. 4f)i). Imperial Hank of (rcnnaiii/.—Thv Imperial liankof Ciermany, or Heichsbank, was founded in 187.5. Its organizatio)! was one of the measures adoj)te(I by liismarek to bring order out of the monetary chaos that had existed in the (German states prior to the unification of the empire. Together with other monetary and banking reforms it was made possible largely by the huge war indenuiity of 5*^1, OOO.OOO. ()()() which (iermany collected from France. In IHT.'i the gold standard was adopted, and the mark made the unit of value in place of the thaler. The Imperial liank Mas organized upon the founda- tions of the Hank of Prussia, established a century earlier. This bank was owned j)rivately but was con- trolled by the Prussian (iovernmetit. The Imperial (io\ernmeii', purchased the Prussian interest, raised tht cai)ital from i>0,()()0.(»()0 t balers lo 1 •_'(),()()(),()()() marks, and sold the stock to private interests. ')()(). lufhicucc of ij;ovcntmcuL Although the gov- ernment is not a stockholder it exercises direct control over the l»ank"s iiffairs, so that it is much more essen- tially a govtrnuKiit institution than arc the banks of Kngland and France. Tlse Chancellor of the Empin is the gtnerning olHcer. Associated with him are four directors, ofic named l)y the Kmperor, and the others lt\ till- l''cd(ral Council. 'I'he stockholders elect annu- ally a commission of fiftcdi members which act> in an EUROPEAN BANKING SYSTEMS 407 advisory capacity but has no real control of the bank's affairs. The bank acts as fiscal agent for the government without pay; and furthermore, the stockliolders share tlie profits with the government. First, a dividend of 31/2 per cent is paid to the stockholders; second, one- fifth of the balance goes into the bank's surplus; tliird, tlie stockliolders and the government then share e(iually until the stockholders have received 8 per cent, after wliich the government receives the remainder. .501. Modeled on Bank of England.— The regula- tions in regard to the issue of notes were modeled upon the laws of Enghuul witli certain modifications which liave been very useful. Tlie Ueichsbank was given a circulation of 2.50,000,000 marks, with the further pro- vision that M-hen other note-issuing banks (of which there were then thirty-two) gave up the privilege, the Reichsbank might increase its issue in like amount. At present only six banks still issue notes, so that the circu- lation of the Reichsbank has been considerably increased, its capital was increased in 1905 to 180,000,000 marks, and it now has .320 branches. ;502. 7i*r.srnY'.s'.— The Reichsbank is recjuired to keep a cash rcsei've of one-third of its circulation, two-thirds being secured by first-class commercial paper maturing within ninety days. It is evident that this provision renders the currency much more elastic than that of Kngland where the cash reserve must be 100 per cent. Furthermore, the Reichsbank is entitled to exceed the limit set for the amount of no..^ it can issue iiy l)aying a tax of .5 per cent per aruium upon all circulation above the maximum limit. This creates :i circulation th.'it can be used in emergencies without the necessitv of suspending the limit l)y special enactment, as Kng- iil 408 MONEY AM) H AX KING ■il^ »: 'J J, land is compc-UtHl to do. Tliis plan has been incor- I)oi-atcd into a number of the systems whieh have been su^iroested lor adoi)tion in the Cnited States. It is worthy of note that no speeial fund is set aside for bank note redemption. In case of dissolution the depositors and note holders would be in the same posi- tion. The deposit currency, however, has not grown greatly in (iermany, so that the note holders would always be the chief creditors. The system has worked out very well in practice. The notes have always cir- culated freely and without discount. The bailk has followed the |)rece(lent of the Bank of Enoland and the Bank of France, and conducts its affairs on a very conservative basis, maintaining, like the Bank of France, an average reserve of <)() per cent of its circu- lation. In its conservatism it is very like both its pred- ecessors; in its plan of note issue it seems to have taken a middle ground between the two older schools, adoj)t- ing many of the good points of each; but in its manage- ment it has de|)arted entirely froni the other institutions in that its control is entirely in the hands of the Imperial Cioxcrnment.' ' Much v.iliial)!,- iiit'orinati,.ii cnnccrniiig I'.uni|..-;m l.,inkinL' svst.-ms is <-;'iilMin,-r). The reasons for the failure of the free l)anks are not l.ir to seek. The banks could make more money under the old system. The capital gathered togetlu r in .-uiy eommi iiity to start a bank was forthwith sent away tn buy the bonds as an initial deposit against tiotcs. The proprietors, to I)e sure, secured the ru>tis: l)ut. except for the small iterest yield on the bonds, they were ex- actly in the stmc position with respect ir the amount of loanable funds as they Mere iK-fore. Moreover, they were obliged thenceforth to keep an m \.' i$'., li uo MONEY AM) BAMvIXG i^^mt office I'or (liscoiiiit and dcijosit, and to he ready at all times to pay specie whenever tl.e notes were presented tor i)aynient. On ihe other hand, the cliartered hanks issued notes against tiieir _yeneral cre(ht, and so had control of their ori^ri^al capital and oi' the resources arisino- from wiiatever {)ortion of their authorized note issue they could keep In circulation. I'pon this general loan fund they could earn the current discount rate, and whatever additional yains were incidental to hank- in.y operations in their territory. It can thus he readily seen that the (iiartered hank was the more etJicient iii- striiment hoth for the advantage of the stockholders and for the community as a whole. And l)ein().). Hnision of the ffcncrnl hnnlhi^ measure of JS7!. — Enough has now Ikxh said, perjiaps, to make it clear that the present Canadian l.anking system owes its origin to the early l)aidsing c\j)erin.ents of the several prov- inces. Limits of space will not permit of a detailed ex- position of hatddng legislation from coid'ederatior. to the i)resent time: nor, indeed, is it necessary. The act now in force is merely a revision of the general hankitig measure of 1H71, (he first hai.K act of the Dominion under which the hanks actually worked (;U \"w[., c. .')). Tlie first decennial revision of the act look place in 1880. A decade later, in 1H!>0, the act was suhjected to im- portant amendments which placed it snhsfantially in the form with which wc arc now familiar. Again in 11)00 several imi)ortant changes were made. All these modi- fications, however, in so far as they hear ujion the system as it rxisfs fo-day. may he in s| d( sciJIh.I Ji, ;,r. analysis of the act as it was last rr\ iscd in !1)i;{. .'}()(). luvnrporali,,,, (,f hanks. - The p?-ovisions of the bunk act witli respect (o the incorporation of wvw hanks CANADIAN BANKINCi SVSTK.M ir are iiitciuled to ^nard aQains*^ the entry of unfit or iiie.x- j)erienee(l persons into tlie bankin^r business. With this end in view it is provided that the niininiuni re(|uired eapital shall be .%}()().()()(), ol' whi.-li ofie-huU' must be hdiia fide paid in and all subseribed btt'oiv a eertifieate ( an bf seeui'ed I Voni the Treasury IJoard pei-niittin^- the institution to be<4in business. Xo eertifieate can be f^ranted by the I'l'iasury Hoard uidess it has been shown that all the re(iuirenients of the act as to the subscription (»f capital stock, fhe ])ayinents of money by subserilK'rs on account of theii- sul)scriptions. the i)ayments reciuired to be nuuK' to tlie minister ol' finance, the eleciion of di- rectors, deposit for security of note issue, and all other j)reliminaries have been compiird with. It also must be made cleai- to the board that tiir e\])('nses of incorpora- tion and oruanizatioii aic i-( ason;'ble. 'I'his board con- sists of the nn'nistcr of finance and five other members nominated fi'om time to time by the •^'overnor-in-coun- lil. The minister of financt.' is clu-irman of tin board, and the deputy ministci' is. cx-ollicio. the secretary. The prcliminai'y re(]uiremcnt riiakc it impossible to (u-<^ani/,e a b;nik in Canada w itii any d( yicc of secrecy. The aj)phcation for a new chartir is soon known toevcrv liaidxcr in the Dominion. The scei'elarv of the Cana- dian Hankers" Association, although not re(|uii"ed to do so by law, at once ^'ets toL>«tlier all pos^ibK" information ill connection with the new entei'prise. He mav cvet\ (liter into u?io(licial eommiinieation with the yo\crnmcnt. and in various ways h( Ip to ni ike it certain that the new ^(M)turc is conducted as a hmic fide bu^.iness. It is thus readily seen flial. as a rule, only b.niks which lia\c allied proper financial backing- ha\t' a chance to enter the Held I. I '.■ ,).. ."iOT- The l)r(i!iiJi Jtinifi s/i.sl( in. As Dean .lo.seph e-vii— ,>7 US M()\i:V AND IJANKIMJ r'rt'iich .loIiMsoii lias so fittingly said, a chartered bank in Canada is a hank of liraneiies. not a bank a\ ith branches. Tlie jiarent bank, wliieh is known as the "bead olTiee." neither takes deposits nor makes loans. It is merely an a(hninisli-ati\ e center. All the bank- in^' business is (hmc by the branches, each of which en- joys considerable inde|.en(lenee. Tliey are all. however, subject to the control of the bead office. The law jjlaces no restriction ujion the number or location of branches. Canadian baidxS. therefore. 1ki\c b'-anchrs and agencies in man\ I'orcinii countries as well as in Canada. That this IS of \(ry ureat advantage to the commerce and ti'ade of Canada (an be easily se- v Tiicre are at the present time ( I'.MM) almost .'{.(MM) .anches of the Cana- dian banks at home and abroad. The inducement to the establishment of branches by banks is. of comse. the possibility of j)rolit. Hut piotits can be made only by making- 1,,; i^. 'll^v^^- |,,;,,,.s nnist i)e made litlu r by issuin-.- circulating- nolcs or bv oprnin- th,. eonimumty ubere the branch uas to be ( stablished. the m..ti\r for the creation of the l)raneh would be absent. \ow, in anrieultural commu- nities in Canada, win re popidntion is coniparativch- sparse, the use of diposit-cuiicncy has not bc'n devcj- oped. in Iced, the eon.btioiis aiv such t|,;,t tin \- would scarcely admit of its use. \Vv liaNe. indetd. "a g'reat number of small communities which -.ould be (nfirdv iinabh- to support independent banks >f small capital, communities \vhieb !:!n!! •!!:■!■• :-t--i-:.z,f,^ :-.. n. II till 1 1 1 1 1 1 oi' notes, not in that of deposits. The tHcd for note CANADIAN HANKlN(i S'i S'lKM 419 iiirrcTicy, nioirovei-, in tlu'st- localities is not constant. Iiiit is manifest only at certain seasons of the year. WJKii the (leiiiand becomes intense, at the period of iiiovino- the eiops. cnrreney mnst he su])plie(l (piicklv ,111(1 at reasonable I'ates. It is jnst here that the llexihil- it\ and the elasticity of the branch bankino' system of ( aiiada are most in e\ idence. In every ])ioneer com- iiiiiiiity and in the farthest frcMitier the bank is almost I he lii'^t instrununt of ei\ ili/ation to ser\e the commn- iiity. oOH. Conditidns' of nnfc issue. — Tender ordinary cir- cumstances the total amount of notes in circulation at any time may not exceed the amount of the nnim])aired paid-u]) capital of the bank to^xther with the amount «)f ciin-ent yold coin and of Dominion notes held for the hank in the central ^(Ad reserves, hereafter to be (K - scribed. 'J'his lattei ])i'o\ ision was added in the revision • if the act in 1!>1.'}. An amendment to the act passed in ]'M)H ])i-ovi combined paid-up capital and sur])lus 1.'J. the paid-uj) capital of tlic hanks was -^1 I.j.7t>'.>.217, and the rest {()>• sur|)lus) ainountt'd to si(lS.41 k.'i.'JT, a total of Ji^-22t.-21.'i,.).)4, The emoro-ency ciiTuIation dui'inn' the autumn and uintc'i- of I!) 12-1;) I. 'J !iii,i>lit, thci'eforc. if necessary, haw reached somewhat (»\er .'}•') million dollars. In Xoveniher. l'.H*_*. the emer- yency cii'culation actually approached SIO.OOO.OOO. and the margin of such circulation .> mailable at that time was ahout -S-JO.OOO.OOO. At ordinarx times that mar«rin v\()id(l he am|)le-. hut it is easily seen that cii-cumstances may ai'isc where such a mar/^in would he w i|)e(| out. .Vt ^ueh a time of (huiuer a comi)arati\ely insiy'uiticant ution may stai't a panic, or a run on a hank. ^Vt the I nd of April. IDl.'J, the (ie])osits ])ayahle on (Kiiiand in Canada were S.'i(!.).34().()()2. and after notice. !^(i.'Jl.l(>(),- I'SO a total of Sl)tM;..)()().2S'J. In Xoveniher. 1!H2. a month when the ))ressure is usually <4i'eatest. the dej)osits were -$1 (».(»()(),()()(> higher. To nuct a run on such a lar<^e jiiiiount a good deal more than S2(),0()(),()()() might be needed. The new provision does much to econoi i/e time and liring j)rompt I'elief. T'irst of ;dl. a goxti'imicnt depait- iiient is eliminated. ()f necissity. there would need to lie a laj)se of time to plact' go\ci'nmental maehiiirrv in motion, as is e\ ideiil now in the time needed to secure l)ominion legal tcndci's. Again, if recourse is had to uojd imports, there is delay in secuiiiig then), and incon- \eiiience in rel( asing the gold \\lien oner the jiced is o\-er. Hut by pooling theii- gold res(!urces in a eeiiti'al ieser\(' the hanks can imme() had lost a dollar through the failure of a bank to i-edeem its notes. This has been due to the following legal reciuirements: 1. Every bank must redeem its notes at its head office, and in such commercial centers as are designated by the treasury board. These redemption cities are: Toronto, Montreal. Halifax, St. .Johti. Winnipeg, Victoria. Char- lot tetown, liegina and Calgai'y. •_'. Each hank must keep on deposit with the minister of finance a sum of lawful money (gold oi* Dominion notes) e(|ual to .'> \ni' cent of its axerage annual circula- tion; the total so dei)osite(l is called the "^-irculation re- demption fund." It is an insurance fund for use, if need be, in the redemption of notes of failed banks. The cir- culation fund bears interest at tiie rate of a per cent per annum. fjl ill m 4-24 .M<)\l;^ AM) n.\\Ki.\(; ''i. IJ;inl< iioUs possess :i first lien upon tlic assets of ,i iiank. 4. Hank stockholders aie lial)i( . in the even! of u l)arik'.s iaihn-e. to an assessment e(|i.al to tlie par vahie of then- stoek. 'I'liis. ol' eonrse. proteeN the general cred- itor as well as the note-holder. '). Kach hank ninst oive a detailed monthly statement of its^airairs. accordin-' to a schedule provided in the Jict, These statements must he signed hy responsihle officers of the institution. 5. Provision is made in the rexision iA' IDl.'J for s.iareholdcrs' audit of the hank's affairs: and also for a sj)ccial rei)()rt from the auditors, wiien ivqnired hy the mim'ster of finance. 7. The Canadian Hankers' Association, an in^'orpo- rated hody of uhifj, rach hank is a mem!)er, is ^-iwn supervision hy the act of the issue and cancellation of notes, and of the affairs of a failed hank. 8. The notes of a failed hank draw irtvnst at .5 per cent from the date fixed for their redemption hv the minister of finance, who may redeem then) out if the assets of the i)ank or out of the ^circulation redemntion fund." ^ These reciuircmciits make the Canadian hank note ab- solutely safe, althou-li the first feature is the most im- portant one. In that respect tlic Caria.ilan system for retirino- notes resemhlcs the famous .Suffolk plan of note rcdemi»ti()n. the most successful experiment in early American hanking- history. .512. h't serves ftard /;// etch hank.—Tho snhjeet of cash reserves docs not receixc much attention in the act. It is almost iiicredii)le to the Ameiican hanker that, aj)- paj-ciJiiV, so ill lie rn.Mi-iii Is ^^'\\\-u to this vital feature in sound hankino-. The law merely provides that the CANADIAN HANKINC; S\sri:.\l 4i>5 hank sliall hold not less than K) per nut of its cash i-c- scrvcs, which it has in Canaihi, in Dominion notes. The ininistcr of finance must make all necessary arrange- ments to deli\er Domin on notes to the hanks, in ex- change for gold coin, at the se\eral hfanch otiices of the department of tinanee at which Dominion notes are ifdeemahle. It is, of course, necessary that a hank sliould he ahle at all times ;o meet its demand ohligations. and to that end should have always ^ome |)ortion of its assets ready ill tlie form of legal-ttnder money. lint what that amount of cash reser\-es shoidd he will depend ui)on niany I irenmstanees — tiie husiness hahits of its customers, the extent and character of its demand and shoi't-time lia- t»ilities, and especially upon the degree of caution and conservatism employed in its management. In well-es- taldished hanks, managed ly conservati\e and experi- enced hankers, the ])i'ol)lem always settles itself without dilHeuIty. That is why, among other reasons. Canadian hankers ohjeet to fixed reserves heing made .*i re(iuire- ment. The hankers nemselves ire hetter al)le than any government to decide what pioportion of tlie dejxjsit or note liuhility the '>ank recjuires iti the foi'm of cash, to meet any calls which may be made. \\'hen that is de- termined, Canadian t)ajikers endeaxor at all times to hold an amount which is safely ahove the re(|iiii'ed limit. Without entering into any expended theoretical dis- cussion of the matter, it may further he said that Cana- dian hankers maintain that a I'cserve, if it is to he of any service, must l)c read}- for instant use. Xow a fixed legal resei-\e may deieat its own ends if the law is strictly enfoived. This is sufficiently well recognized in the United .'- ates where the hanks have, in periods of stress, on more than one occasion depleted their legal ^2(i .M()\i;^' AM) H.\\K(\(, fsf- reserves. One of the most iiotaMe iiistaiiees oecnired in the first weeU of August, 1K!»;{, when the aogicuate reserves oC the \''\\ York C'itv ha?)ks uere $1 i,()()(>.000 helow tlie 2.") ]hv eeiit Hmit. Caiuidian bankers aHirni, tliereforc, that in hist analy is th'- fixed leoal reserve is usifnl only as a sort of \iarnin ;■ hell — a notiee to the i)anh that if its reserves fall Ih-1o\v a eertain limit, its cash and liabilities are not in the i>roj)ortioi\ that eon- ser\ati\e bankers would ai)i)rove. They maintain, moreover, that a jaw re(|iiirii.o- Icual reserves may he (|uite applieable to a system v.l' thousands of e()mj)ar;'- tively small indejiendent banks, but that sueli is not needed in the Canadian system, wiiieji is made up of a limited number of very powerful banks under the con- ti'ol of eonserv.ttive and experieneed managers. A Canadian bank manager keeps before liim the amount of time dei)osits and demand deposits, and the notes outstanding. The time deposits form mueh the largest of these items. They bear interest at :i per eent. and while not legally jjayable on demand they are always l)i'omj)tly paid on reciuest. no banker wishing to have it rumored that all obligations are not pr()m])tlv met. A l)aiik's credit would suffer if it took advantaiie of its legal privilege to delay payment for even ten days. With these faets before him. experience and intimate knowledge of the bank's afi'airs ))ermit the manaiicr to ad just the reserves very near to the ideal limit. .jI.'J. Ji'cscncs composed of four dements. — In prac- tice the bankei- considers his reser\cs as conn)iisin<'' four different kinds of assets: (1) Cash on hand, (2) cash balances in other banks. {'.\\ call loans, and (4) securi- ties. Strictly sjjcaking "cash reserves"' mean only the Mrst, t)ut a banker usually has In mind tlic first and sec- ond when s|)eaking of his cash reserve. There is a gen- ( A.\.\i)iA\ ii.\\i(iN(; s^■s^^,.M 421 I lal'iN" imdiTstood ;i;41"((1ikii! ;iiii<)||m ||i, |),iii] j)c'r cent of its lial)iliti(.'.s. Ol' tli\ H jici- wwt ^lM)lll(^ !)(.' casli Mil hand, the rfiiaiiiiinu T |'/.)S'J..") K) of (••lil loans outstandiiu^' In Canada, and «'M;.1.-,1.-J0*> elsewheic. Most of the lat- (i !■ wci'c out in New ^'ork ("itv. the fa\i)r:te call-loan market lor Canadian hanks. '!'h<' hankers do not re- L'.ar.j call h.uns in the country as iti .uiy I'cspeet e(]uiva- leiit t») cash. Tiie eollateraJ securities i-annot he (piickly niarkotul without a sacritic<'. the stock market not heinu; on a sutHciently lii-oad hasis in Canada. Moi'eoNci-. the payment of domestic call loans would result sii;ii)ly '" •■• i'educti(!U of hank dei)osits. as has often Wvn illustiated hy a ])arallel situai:i(;i! in \ew 'S'oi'k C ity. It is (juiie otherwise with a call loan payal)lc in Xew N'ork City, and scured hy hitih-elass collateral. In noimal times such loans can he convei'ted into mon>. y within tweidv-fo'.;r hours. 'IMiis adds to the h;!nk's cash reserve in Canada cither hy the sale of Xew 'S'ork ex- change or hy an im|)ortation of ^old. If the market is |)anicky ni .New \ Ork, and ^'old camioi he secau'cd. as in 11)07. the Canadian hanks may use tlicir Xew \ovk m i'-'s MOMIN AM) |{.\\KI\(; 1:1 U'l: hjilanccs to l)iiy ^hi'ljim I. ills of (•\cli;m^(.. TIk y vaw tlicn iiuporl rrcin LoikIom w Imtcxcr u(,!,| |||..y m,,!. ."jI,"). 1 iivisliinni scciiril/c.s. Haiikrrs (■aiiiiot, and as a nilr do not, ])\iivv iiiiicli i-cliaiicr upon stcuriHis as nai! of tlifir iTsfi'\ CVS. Tlicsr foi'in a srcond li dcfciKv to wliich tlif liafd. ()()!>.- Hn puhlie se.";rities. s-_>;{.s-J7.t;i;{ ; railway and otiur honds. dehentiircs and stocks. Sf;7.(»-Ji .;, tl. As a luh . the securities held hy the hanks do ii,,t llu-'tuatc ui-(atl\ iii anionnt; tlic\- ]>vvi\y, as a rule, to rednce their cajl loans in \eu 'S'ork to Ixiild up their casji riser\cs. ")1<;. J,<>(iii.s In iiKiniil'achircrs. :Ji: ,1111/ fann- ers. Ill addition to the power ^ranttd to Ca?iadian hanks to cn^au,. {,, ordinary hankinu l>iisiiicss. they arc permitted to assume \(r\ important functions in aidinu the manufacturino- and wliolcsak trad<- of the eouiitrv. The haidar is empowered to lend mom y en the sc.an'ilx of wan house re'ci|)ts and hills of ladiuL',. Loan- are ^;|-atil((j to wholesale dealt rs and d'lppt in of produce of all kinds. The hanks ha\c a lien, not only upon tln' ^oods oriwinally acee|)ted as sccui-ity. hut also upon the ^■oods which ill the c.airsc of hiisi;,ess aiv >.iihsiitut( d therefor. The same jiolicy is *' llowcj in |,,;i|p, ,,,..,,1,, |,, inaniifacturt rs. Thus. ili. hanks hecomc \ irfiialU silent partiurs in hii>iness. As far as pi.ssihle. the hank act «-s-^ rANADIAN IJ.WKINC; SVSTK.M V2{) i II I iii.ikcs iiicirliandisf of all kinds a sort of collateral siru- niy for l)aiik arlxaiicvs. A laral(r. and the manufacturer w t re recei\ing bene- lils in which the farmer could nr*t participate. That the I'.irnicrs could not secure ad\ances u|M)n urain and cattle still in their |)os<;ession was (juite true: I'll! (hat they were not furnished with sullicicnt bankin<>- ncomiiiodaiion ofhei-wivc dots not seem to have been I lair eliaiL;c against I he banks, '{'he banks ha\c natii- I lily rrfiis((l to advance tlu in mon * ii ■'ii it; 111 KJO .M()M:V AM) I{.\M\IN(; tn *¥il .April. 1!»1.'}. Sir l^diiiiind \Valkcr, l^-(\si!>.'.>2»>. and loans to si.'J.().'{.).7Sk Moreover, wjiilc in former davs in the oldt r provinces the hald^s waited until a eom- mimity had a population of two or three thousand hefoiv oi)eninu a hraneh. at the |)resent time hanks o(, j,, with each railway division in the \\'( st. and are ready to do husiness with the lii'st stoi'ekeeper. In tlx' Peace ]{\\vr disti-ict h;!nl>s are to-d.iy many miles in advance of the railways. It i'^. on tin avcra^i'. two or three vcars he- fore these hanks can l>e exiK'cted to pay. The new terms of the act. under which the I)anks ma\ make advances to farmers on tlu'ir ,yi'aiii. w ill hr of urcat henefit to the West, '['he farmer has heen (om|)ellcd hitherto to close his (jnancial year :d)out the tirst of \o- vemhei-. This is heeause the Wist is a hiu' })Oi'i-o\\ iu" count IV ;uid is. to ;t |;,ro(. rxlciit. dependent upon the an-ricultural impleriK nt makers for credit. These coin- l)anies. in s( llin<.- (,, H,,. farmer, have made notes of the latter f.ill due Xovcmhcr 1st, c'lch year. The result is that the farmers have Ixvri compdied to throw tlicii- produce on the m.irket in the months of .Sepiemher and Octoher. as soon a- the ur;,i,, js threshed, to secure the necessarv nmney to mci t ih.lr payments. Oiu- i-csult of thi' unfoitnnate state of alfairs has h. rn that Can- •'"'•' 'i''"^ 'I'K' '" lace ;i Mr.ain hlockade each vear. The f'ln.K IN li.ix, had to throw IIk ir ^rain on. the market at •■' '"'"■ ^^'i<" i' would hrin.u' fli'' smallest pric<'s. Th<' new Icuisi.atiori v\ii| make it possihje to h,.rrow. on thr(sii(d uram in their possession for two. three and f"iir months, 'n,, m;,iri uill ||,ns lie shipped out or;id- CANADIAN HANK!N(; SYSTEM 4;u iijilly ,'1(1(1 al).sorl)c 1, as rc(niirc(l ii (lie world's markets. At the ;,ame time the farmers will he in a hetter position tn ])ay their maehiiie and store hills as these heeome line. They will he [)Iace(l on terms inore nearly ap- I'lnaehinn- .(inalify with the wholesakT and the manu- facturer than they lia\e heen in the past. .")17. Inlcnial hmik inspcvtiou. — At the last revision of the act the ^rt^neral puhlie were more eoneer?ied in the indhlem of an a(ie(|uate system of inspeetion tluui in anythm^r v\sl\ 'V\w immediate rea.son therefor was the disastrous failure of the Farmers" liank Mhieh oamhled it-; resources o?i the Keeley i.tine. I-'or several years pieviously. however, there was a strong- demand for sniiK" system of external inspection of tiie hanks, the prineipal advocate of this iiuiovation hein«r Mr. II. ('. McLeod. late general manager of (he Hank of \(/^a Scotia. In response to the <4'eneral demand several hanks of their )\\ii accord estahlished a shareholders' ■ludit in addition to the ordinary internal examination of 'he hank. In the act as revised the hanks still retain their fornu r system of insjx'ction, which is now sii|)pUiiiented l)v a shareholdeis" audit. The hanl.s will continue to place rliief reliance upon their own ins|)e;'tors, the mineral niana/r(-r, and the hoard of directors. Thev expect verv little in the wa\ of results from the shareholder^' audit, riic ki'ynoti' o ■ the ornani/.ation of Canadian hanks has iluays hern the centralizatinu (»f rcspo.isihilitv. The general manager is jiractically supreme. He lia-> an irmy of employees, jdl of whom hut two or three ha\c l"ri m I •fill m ■• H \'f. tm m 432 M()M:V AM) HANKING h is practically unlimited. Tlic <4ciieral manager of a Ca- nadian hauU knows so niiicli more about actual business conditions tliat Aviicrc there is a contlict of o})inion l)c- twciii liiin and the directors the latter usually bow to his judf^ment. lie is. as a I'ule. assisted by two or three officers a))])ointe(l i)y the directors. mIiosc business it is to aid the general manager and su|)j)lement whatever information may In re(|uired of him. The chief ac- countant is expected to know (piite as niui h about the banks affairs as the general manae taken only for "hat they are worth. In the case of several of the failed hanks they have heen made with evei-y decree of falsification, heeause no independent eheekin^r of figures ^vas possihle. .■)1H. Hank failures in (\ina(Ja. Thwc have heen a I mher of disastrous haids failures in C anada since Con- lederation. the most imjinrtant heino- tho>e of the ]']\- ■lian^rc, Ontario. Soxerei^^n and 1 armers" IJanks. In •lie ease of the Ontario and the l"a' n< rs' IJanks there \< re no losses to citln r note holders or depositors. The Ontario was tnk.ti over hy the Hank of Montreal and liquidated hy that insiiliit mn. The Soxcreinn was ah- -'•rhed hy ;t .<4r< -ip ol hanks which (ii\id((| its otlices (•-VII— js tit '€ i;u MONEY AM) n.WKIXG aiiinii^ tlicm. accoulin^ to districts. This was done partly in st'lt'-dfrciicc. to jireveiit a !»•_*,}. *>! .1. ST ( ANADI.W HANKIN:; SVSTKM 435 4. Total losses l)v cirditors ( c\clii(linir shareholders) from hank failures since Confederation G. 000.3.57 .'). Total losses hy creditors throu<)h fail- ures of hanks which coidd have !)een organized under the present Hank Act iMTO.'XIf) And these consist of -t hanks; losses hy: Exchann-e liank •$.574. .)87 Central liank 7.08.'J St. Jean Bank 200.088 Farmers" Hank 1.208.:U)8 3. Percenta<^e of total assets of faik'd hanks since Cotifederation to the t(»tal assets of all hanks on Decemher •^1- li»l-' 5.09 7. Percentage of totnl losses hy creditors to total assets of all failed hanks. . . 7. 830 H. Pei-ceiita^'e of total losses hy creditors of failed hanks to total assets of all !)anks oi l)eceml)er 31. 1012 .3001 0. Percentage of total josses !)y creditors throu These comparisons, of course, do not take into ac- count the \ei-y laroc- losses hy shareholders. Hut from that point of \ lew it may he said that in Canada there iiave heen less failures in hanking' than sn any other field of cnter|)rise. Moreo\tr. it should hi- notid that it is scarcely worth wiiile to make comparisons he'.ueen fail- ures in hanking in Canada and in otiiei- countries. In i-i m m un> yH)Sl.\ AM) HAMvlNCi i: tlic case of the I'liitcd Slates, lor exaiupk', \vc would h-dve to take into eonsideration the State IJanks and Trust Cornpauies as well as the National Hanks, where- as in Canada there is hut the one systeni of hankin^. However that may he. the ])eo])lc of Canada wrrr thorou disiiuisin^' the fact that such losses eventually must he sustained l)\- the country. They merely ])lace the ^ox ei-niiieni in ilie place of the depositois. and that mainly foi- |)olitieal reasons, \e\ertheless. when all the tacts are consid- ered, it seems (|uite evident that the Treasury Hoai'd never should have ui-anted a certificate to the Faiiners" Bank permitting' it to heyin huslncss. .■)11). Slnirf/ifjhlrrs' (iiidif. — As a result of the demand for inde])end(.'nt examination of the l)atdht necessai-y. In addi- tion, the minister of finance may direct any auditor ;;])pointe(l accordino- to the ])r()visions of the act to make a special return to him. the service so performed to lie remiiiKraied hy the ^'oN'crnment. This external examination of the head office of a hank and its chief hi-anches is sim])ly an attempt to do for the l)ank what has been done foi- years foi- the lar^^e iiK-rcantile houses and manufactui-eivs. A thorough ex- amination of the ai'c correct. Hut the added sionatiii'c (.f expert accountants will make assui'anci' doiihly sui-e. Xe\ eitheless. too much must not he ex])ecte(l IVom this system of audit. .\firr all. it cannot do more than \erifv the fi'^ui'es ami statements of m ^l^s MOM.V AM) HANKING ii !>iiiik. It caiiiiol jiidoe „f tlie (itiality of fhc assets lield a fact of paranioiint iniixirtaiUT luillur c-aii it ptvvciit loans IHJM-- approved of by the directors. In t\ 1 1 y larnc- iiridrrtakinn. resjxMisihility rimst finally rest upon the directors and cliie!" e\ccnti\ c oHiccrs. .VJO. ('(inadid,, IhniJccrs' J.ssorialioii. - TI. • Canadian Iiaidronnd that in the country towns and rural districts, they do not make loans to ar.y great extent. Much of this discussion is apparently based u])on the assumption that the banks have to do only with direct customers, or at least with those who apply for loans. This is obviously not the case. Every economii- institu- tion lias its direct relationshii) to the well-beint S,5()().()()(). oT which S2.)(), ()()() must i)e i)aid up hcfocf it can hcwin hnsiness. Should the Hard< Act rwv ^^]\v authority Tor the or-^-anization '»!' small hanks, tlu proliahl ■ i-csult woidd he the ruin ol' the uiitoi-lnnate stockholder and hea\y losses to the de- positors. J-'.ven a liank of sjoo.ooo could not |)r()titahly comi)ete with the lar^e hanks unless it were estahlislied in a place of '-onsiderahle size. Without hranches it could not <^() into a small place at all: it woukl lia\e to confine' itself to a town \\liei-e there v.onKl I)e a com- parati\ely \:\rmMt* I,,.,..,.!, !:•!!;!. ^ • h:! I. \., '.'..:: \. loans a" fair rates. Otheruisc. thev are ohli^cd to turn CANADIAN BANKING P1{0HL1:MS 111 '-HP to ])rivatc hankers and money lenders ulio eliarge liigli, almost exorbitant, rates. Mr. J. B. Forgan, president of the First National Hank of C'hieago. gave some very illuminating evi- ('(iice on this jjoint before the Committee on Hanking and C'ommeree at Ottawa, in ^\i)rii. l'.)l.'{. He ex- plained that, as a rule, the loeal Iniwk was organi/ed. in tiie I 'nited States, by loeal bori'owers, who wanteil to utilize its funds: and that it was ecjntrolled by those borrowers. Loeal bankers, a? a I'ule. wish to elitig to tlieir authority over loeal financial matters. Sir Va\- iiimuf Walker, testifying before the sub-committee of the Hanking and ("urrcney Committee at Washington as to the alleged supei'iority of the local o\ ci- the branch bank, said: "It is one of thosi- popular \ iews that is repeated o\er and o\er again, but ! am (juite positixc that under the branch system we ser\-e the customer bct- lir than the local baid< can do." 'I'he local bank is too a|)f to get into a iMit : to serve the interests of a i)articu- lar set or clifiuc. The big chartered banks of Canada can afl'oi'd to take an impci'sonal point of view. Mr. Meeker, of l*rinceton Fniversitv. follow inu' Sir Kd- iiiiind Walker befoi'c the same committee, said: "The local baid\cr is not so well able to furnish the necessary ci-cdits in his loeal community as is the managci' of the liranch of a larger bank. The loctd banker, moicoxcr. ■- likely to fa\()r ceitain infci'csts." .")•_'*_*. ('(nicitilrntion of rcscn'ts in liranih Ixiiihs. One o\' the chief i-caso?)s w by the branch banks lia\ r bccu able to a\i)id a uidc-spread linaneial panic lia.> Imii because "I tbcii- control n\' rcscr\ I's. Canadians ri'gard as waste- I 111, dang (roils and unscientific tin maimer in w bicb each "I more than I'T.OOO banks in the I 'iiif< d Slates iindei- iiiok lo control its own legal reserves. I'Ik \ !ecoi,;ni/(.- ni til i 11 Ui MoNKV .KM) BA.XKLWi iff fliat whenever aiiythinn- oeeurs to shake pnbhc Ponfi (leiiee the hanks nnist he the first to take ahinn wheii these are h)eal. and independent of one another. At sneh a time, in tlie ( 'nitid -States, eaeh hank jjroeeeded to sti-ennthen its own casli reserves, hy enrtaihn^' ere(h'ls an(i eonvei'tino its h)ans into cash. The result was that the ;^()hl snp])ly of the eountry was (hstrihnted anionu 27,000 !)anks. instead of i)ein-' payments since the C'ord'edera- tion. This has heen due in larye measure to the fact that the cash re(|uirements of each district are cared for hy the head oHice. .)•_>;{. XiiHihcr (if hfiiih.s l(, iKipiildtioN. It has somi- timcs hctn said that the Canadian chartered hanks do not providf sulHcienl hranclies to meet the needs of tlu people. This is not horne out !>y the facts. Aecoi'dini; to a \ciy careful statement |)re|)ared hy Sir Kdmund Walker and sul)mittt(l to the ("oiiimittee on Hankinu and Commerce in .\piil. I'.d.'J. there is one haid; to each 2. HtT of the population, in the ('nited Kingdom there is (»ne liank to each .kIK". persons. In iMi^land. alone, there is one hank to each ,").l.-J!t of tlie population. In Scotland, where the luaneh-hank sysli ni exists in the most com|)|(te form. thei-e is .mt hank to each L'.ior, P<"1*'<'- ' " !''<■ ' iiited Stales there is one hank to eacii •'ktM) of the population. Scotland is the onlv countr\ w hieh exceeds Canada, .ind it d()(>. It lias one haiilv to .").(!7+ persons. Toronto lias one hank to •J..'}.j4' of its |)o|)iilation. C'ineinnati, in the Tnited States, lias one fMiik to 9,125. On the other ha'.d. Detroit has one lank to 1.100. Takinj^' Canada as a whole, there is in the cities one hank to e\ ery .'}.000 of its population: in tile I'nited States there is one hank to every 9,000 per- sons. A point that should not he overlooked is that some .inters of ])opulation are \ei'y liea\y jjorrowcrs of capi- tal, while oidy small deposits ai'e reeei\ id. These jjlaces consist of the husy mannfaeturin;^' centers as distinct tVom the haekward or rin-al distiict. Such place-: con- sist of Herlin. in Ontario, with a hundred manufacturinu' I ^tahlishments. (,f which ei^ht are \cry lar^e: Hrant- iiii-d. with si'xcnty: Peterhoro. with thirty-ti\ c: (Juelpli. \Mtli sexcnty: Sarnia, London, and so on. It is \(rv (ionl'fful whether local capital could ha\e taken care of these places; certainly local deposits could not ha\e done •><). 'i'h.eir prosperity and "growth are due in lar^i' meas- ure to the ahility of the ^rcat chai'tered haid>hin^' industriis. .")•_' !■. l)(/i()sll iiirrincii in ('(iiniihi. There has hcen a la r«>'t' and steady growth of d( posits in C'an.-idian hanks \\iHiin the last decade. The de|)osits stood on May .'{I, r.ti:}. at the urand total of $1 .09-_'.H.50, Mil- a sj)len(lid Niiowin<.i' for a new country whose resources are onlv hc- uinnin^' to he de\i!o|ied. These deposits wcic niade u|) of $.'J(>4.1.)9..'<0_- 7 ■»,"). CO,'}. IcchnicalU- pa\ahk' after a lixid dale hut <>( ri- illy paifl on diiuanil: and ><'.>7.9.'{.').2iri, j)ayal)le else- tu MOM.V AM) H.WKINd ii ' t^^ IL' where than in (";uia(hi. On the same (hite there weiv .$l()lM)!>7.!>;i(; or notes in eimilation. In Cana(hi. anion^' Icoishitors. far less attention ha.^ l;<-en oivrn to (lf])osits than to note issnes. This has hicn (hie. pei-haps. to the east- of ie,nislatin,u' npon nole ivsnes as eonii)are(l uitli dcijosits. and heeanse of the e()nij)arative sparseness of popnlation. taking- tlie eoun- try as a wlioju. In \hc rnrai (hstriets and amon- {1,,. w()rkinishiti\e pin-pose or unidance. In view of the extraordinarv •growth of this kind of cre.jit eiirreiu y. the (jiiestion of the amount of hank notes in eirciikition >( eritielMn ua^ (hrected at tii<' i>^slle of ;. eircidat inu medium of (Achaiiuc liy tlie lianks. instead of li\- tli^ .government. It seems cl.ar. liowcvei-. th.il Ihe nHdJin.! of exchange should he made up of the kinds of monev I KJst convenient for the use of the commiinitv, ami (ANA 1)1 AN HANKIXC. rUOHI.I.MS 41.> ilividcd hctwcfii tliese kinds in Ww proportions niost cou- wwk'vA. uIu'tlRT tlu'sc 1)0 (k'])o.sits oi- hunk notes. \o i(<>islalurc. and no conclave of hankers, i-an determine llic amount i<\' notes needed IVom yeai- to year in the ' \(han,iies of tlie country. The oidy rational process - to pei'inil the liaidss to extend acconunodat ion either li\ a deposit account or in hank notes, as the customer disires. While the deposit currency is almost an ideal medium i! ( xchanu'c in the urhan ceiders. \'et the cost to the Ii.iiik is larmier than is ordinarily su])posed. In fi^urin()rk in\<)l\ed. the cost ol' supcr\ision of liii' mana^ii' and accountant, as well as an apportion- fiK i:t ot' the I'cnt, stationery, liyht. heat, \ault and safe i(( omniodation. and also ef the head ollice expenses. I'.ven if oul\" the salaries of the men actually en^a^'cd in iinndlin;^,' checks and dejjosits ari' considered — the teller tiid ledu'er keeper the cost per cheek amounts to no Micon-idirahle sum. It is also seldom reali/ed that a cluck form on safety paper costs the hank i)et\\een $- ;iiid S'_'.,")() pel' thousand, or practieall> one-cpiai'ter of .1 cent each. ( )f course, in i\ cry hraneh. no niatter hoAV small, there ;u'e certain lixed charucs to maintain, irrespective of the 'iii^iness done. A new hi-anch for several years aftt'r lis opening', has men and machinery to spare, and can li.indle small at'counts withoid any additional expense. I ! is only w hen the husine^s has increased, and mori men Mid acconimod;ii ion are i'e(juired. thai many small ac- ■lunts ma\ lie liindt i(som<'. This explains \\\\\ some !\inks enconrau.c" small checkiuij: accoimls. 'i'lie opcninu if these accoimts enal»le> the manaifcr of lh<' haul to !ii I'oine ■ic(|uaititcd with his neiulihor'-, ;tnd frccpiciilly m IS;,: iW MO\i;v AM) HANKING a small acroiint may turn out profitable or hriiifr desir- al)!f conti-ctioiis. It may he said, however, that'^in last analysis, no aeeount is protitahle or valnahle unless tin ineome exceeds the expense of keepin-' it. In revieuiiii. ;iii aeeonnt the minimum weekly halanee is the on, that determines the loanino' value of the deposit to ;i liank. .'yj.'i. Cnticisiii (if htiiih--i/()tc m/zcv. The note eiren- lation of Canadian hanks on May .'Jl, l!»i:{. was Sio-j.- JM)7.9;}»i. This circulation has been denounced hy certain Henients throughout the country as heino^ "a prac- tical uin from the oovernment to the hanks (7|' over one '"""'•■<■'' I'lillion dollars. This criticism has found ex- pressi()n hi such organs as The Farmrr.s' Advocaic and The (intiu drowcrs' (in'idc. It is complained ,nat tlii^ c'lirrency is not subject to a tax of any kind, as is the case in some other countries : and that, moreover, instead <»r l)ein,M' secured by i.-,,!,! ,„• u(,vrrmuent bonds, it is sim- ply made a i)referred lien a-ainst the oeneral assets of the baid-.. 'i'his. ace-i-dino- to the critics, makes the money of the depositors the securiiy for the note circula- tion ot' the countrv. A more hopeless confusion of mind tlian this i)oint of view indicates, can hardly be imagined. To beoi,, ^vitli. the cirndation of the baidxs cannot exceed the^})aid-up capital. ' \c( |)t dui-inii tin' mo\ in,<4' of the crojts. or whei; notes arc issued anaiust IIk central .yold reserves. In the second place, it is of (-onrse absurd to sav that tli< deposits are the srcurit_\- for the notes. A on'at |»ai't o( Ihc de|)<;si[s arise in Ihe lir>t instance throunh previ,)Us l"ans made by the banks, in which the chief risk is run b\- the baidxsand not by the depositors. Hut that is not all. II i-^eharocd that the Canadian ba>d 417 npinioii that it is worth while to hriclly look into the (|iic'.stioii. .)2(). Profits (til })((iiL--ii()ic issues.- -As a rule, these ( lities do not stoj) to consider that both deoosit aceoiiiits ,111(1 note issues cost the bank a eoiisidei'ahle sum. Es- [Kcially is this ti'ue of the lattei-. The returns from the ( .Miadian Iiaid.!) I- 1- .01 10 >' pt' Mihcr r).()7().l)0() <*(lcil)tr 7.f)f)<).oon \o\fml)t'r ().."):;o.iiO'J Dn'tinber (),K{.'i,()()7 •f71.'-!0.'!.;!:>7 Drstroy. (1 •'t'.>.;577.()U' ().(U.'5.i.'!,'{ 4.8r)().87.') ;!.9:).s.<)8'2 (i.8r):)..'j:)i ;M7i.'.29o 1..">.'!!).().V2 .■">.87-2.S<)l .").ISO.SJ|) ."'..iO'J.O.U :).8i7.8()fi K818.^JH) .f ■'Jp. 1-7 K086 '••if ft ■:il III The ItanU-noie companies charge the Itatiks ^\M) per I. ()((() sheets for en^ravin^- notes. Also, the hank must pay for the cost of plates in the first instance. There .ire four notes to a sheet, so tiie i-ate of -SOO per 1. ()()() •sheets amounts to 2'^ '\ cents ])cr note. The cost of en- ,ura\in<4' the notes for l'.n2 Mould amount to about •S'.il-).- r( ^eniinj^ tlie Marly dei)recialion of the plates. That would make, in lound numbers. S24.j.()0() a year foi- j)rintinti- the notes. I'lie average amount of tiotes in circulation in I'.M'J was ^1()(K()0().()()(). Therefore, the cost ol' print. n^ the notes W MS MOM'.V AM) HANKING s If'-" W lb r aiiioniitcd to alioiit '4 of one per cent on tlie average cii'ciilation. \ 'nder the system prevailing before the re\ ision of the act in 11»1.'}, eacli note was count(M-si' notes at this critical period, oi- of raisinlus or rest fund ecpial to at least .*}() per cent of its iiaid-uj) capital, after deduct- iiiiT all liad and doubtful drbts. On Mav .'H. li)l.'}. the paid-up capital of the banks amounted to i^l l.),l)(ii).l..'{;j and the rest to SlOS.CSl .2:}(). The ])racticr of buildino- up larne reserve funds mav have been well enouuh iu its time, but it is liardh- in the e— \"II"^:iO i. [JO MONEY AND 13 AX KING Hi i£t- best interests of either the hjuiks or the eountry to-{hi\ . In earher (htys tlie earning power of the hanks was much in excess of that of orchnary and reasonably secure in- vestments. Stoekliohhrs. therefore, asirh- from the pro- vision of the act. were content uitli the distribution of a \ cry moderate share of the profits. They were content to put the rest back into tlieir pn pcrty. for ihcir ultimate welfare. Hut to-day every form of investment expects a hioher return. The earninos of the banks, calculated upon the real amount of the shareholders' investments, are no lontrer exceptionally laroe. Moi-cover. in the early days there were \ery few forms of investment which compared with banking' in attractix eness: par- ticularly to well-informed invesloi's who feit that tiny could .iudoe of the calibre and (•har.iet( r (d' the meii in charge of the banks. To-day. ^\'\\]^ the enormous in- crease and di\crsi(ieation of corjioi-ate finaneinn-. there are scores of opportunities e(|ually attractive as bink- in^-. If an investor m ants as hi^t^h a rate of earninus with about the same deo-ree of security, hundn ds of kinds of preferred stocks are otiered for his approval. If he wishes sound security with a chance to jiarticipate in future o-alns. he may select any one of maiiv dilt'erent bonds, each carry ino- •, h(Muis of common stock. Ca- nadian municijjal bonds are risin.u' to a ooint where their yield compares favorably with that of bank stocks, and investment in them involves hardly any risk at all. It is hardly possible for banks to continue their past policy and expect to secure cap'ital subject to double liability, at tlie old divid'^nd rate. The banks are, as a niatti'r of fact, earning more than they ever were. These earninos may be further in- creased by economies resuitm»- from amalgamation, and agreements regarding extensions into new territory; and CANADIAN I{.\NKIN(i IMtOHI.l.MS \oi i.i ly irdiK-iny tlic 'uiionnt of ca]:;ital iti tlie form r-i sur- )lns cm }) loved in unproductive ways — palatial office Innldino's and tlic like. '1 Ik carnin<,''.s arc not excessive iiy any means; hut they are large enou<. h to make i)ank- ing investment look attractive aloni>side of other tmn- <;pecidati\e entei'prises in the Dominion, if only the directoi-s would make a distrihutinn of a projjcr pro- pi'iiion o|' those earnin()'s. But instead of this, so small .1 proportion is allowed {o reac-h the shareholder in the I'nin of dixidends that the stock exchanores — which value a stock very lar- up of enormous reserve funds by means of the liio-h premiums. The stronger and hetter- estahjishcvl hanks actually made their shareholders pay a price for new stock which jjrovided the l;aidv with money at less than jier cent. This, too, was on an i;i\ estment that made tiie purchaser liable to a loss ( nom- inal, it is true, but still a factor to be considered) ecpial '• the face value of the stock purchased. This double iia])ility feature cannot be ignored. Canada urgently needs more banking capital. The hanks themselves urgently need more capital. Tliey need it in order to increase their circulation, which is limited by the paid-up capital, if for no other purpose. I hat cn-culation is free, untaxed ai.d based upon the general assets of the bank. The banks now regularly 4 .M().\i;V AN!) n.\NKI\(r If-- excad tln' iMitaxcd cii'ciilat ion in rvvvy iiioiiili of tln^ yea.- ( Scptuiiiljcr to I-'ehriiary i iti wliicli tlicv arc \)vr- iiiittud to do so. Tliey are ])rat'ti('ally t'orced to do so; and tlity pay a tax of .) per cent for the pri\ il( yc. There is hardly a hank in Caiuuhi which eould not k( i r- oiiistaiuhn^' i'ii'cnlation {'(jnal to the I'nll amount of it-, eaj)itai foi' niru' months in tlie year and moi'e. liidei" these eii'enmstaiiecs. why shonhl a hank seek to maintain a I'est fund <'(|nal to its eapitah hy issuin.u' new stoeU at ^'JOO. anii nort' \\v issninu" twice the amonnt at •**'1()() it eould increase its circulation facilities twice as nincli. ui\ c \aluahlc ' i-i;^hts"" to its stockholders tliat w'ouid make them feel an int(.'i-est in the expansion of the haid-; s husiness. and 'ivc the ci'editoi's of the hank not only cMpial secui'ity hut a n'reat-r security hecause of the donhU' lialiility extendiui^' to twice as lar^e an amount of ca])ital. I'eri : ps such a di\ision of pi'ofjts would he extreme: hut at any rate new stock should l)e put out a y-ood deal under the s-joo mai'^^in. In the formative days of Canadian haiikin;^' fear ol the (loiiMe lialiility was undouhtedly a stroii;^' diterrenl a<4ainst the |)olicy of lar^i- ca.nital and a -mall surplus, 'riierel'ore. the liuiiU ^f the sharcholdcrvs wei-e put into tlu' I'est and not the capital tol' the plU'pose of keepiuLl the douhle liahility (lov\n. Uut the well-estahlished hanks are now on m» lii-ni a hasis that the douhle liahil- ity is hardly a factoi- in i^ovcrninu' the clioict of inxe-t- nient. It is hardly to he supposed, foi' example, thai I lu luarket p(is!ti(»n of the Ho\al Ha(d\ would hr iui- ])an'. d if the entii'e «•_' 1. 000. ()()() of comhined capita! and rest w(i'e entered as capital, uistead of heiny'. as now. SI l..")()0.(MM» (ajiital and srj. .-)()(>. OOO yrs\ . 'I'lic douhle lial>dil\ o| the s|iai< liol{|( 1 > wouki iie nicreascd h\- spj.- oOO.OOO 1)\ the chau'ic; '» it the clianc<- of tla extra 4^^^ CANADIAN HANKIN(, ni()HLi:.MS K).'? Ii,il)ilily vwv \k'\\]}X ciirorct'd i< so I'tinotc^ as lo Ik almost III nli!4il)k'. The stocklioMn- would rcccixc the saiiu' I'c- tiii'ii. althoiio'li the rate per cent would he lait in two. ( >ii the othei- hand, the hank would he ahle to is^ue notes lip to $24..()()(),()()() it it so w ished : m li.reas. at the present iiiiie, it must i)av a tax for excess issue dui-inu the mo\- iiiu ol' tlie crops. oi- (k'posit {k)llar I'oi- dollar in uold or Dominion notes in the eenti'al i'eser\es. 'l'lii> example, mT eoui-se. is ustd merely hy way of illusti-at ion. While llie hanks will hai'dly turn Hieir sui'plus into ea|)ital hv (leelarin;;- a stock dividend, it is time that the hnildint^- !ip of excessive i-esei'x tvs reeei\ed a check. .VJS. Profits (if tin ('(iiKulidii hdiihs. — It is a conunon ( liai'^'c auainst the hanks that they ai-e making exei'ssi\c prolits. as their juinual statements appear to sjiow. and that til' ])uhlic is paxinu' hio niueli to lia\r its liankiiiu' husiness doni'. To a eei'tain extent tin- hanks ai'e them- M |\(s to hiame for the sjiread of this opinion. They iK |)i'one to hoast of their prosjxi'ity. especially when iluy sick to attract new <"i])ital. .\n exam|)le will make Irar the situation. The ru t prolitsof the Canadian liank "I Commerc'.' for I'.M-J wci'e S'J.KOO. (»()() on a capital of >^ ;.").()()(». ()()(», which is somewhat mori' than IS per cent, itiit d' the sm'plus or I'est is included the pi'ofit would ii.i\( to he computed on S-_>7, .-)()( ).()()(» and would he tlien '|ual to o!ily a little more than 10 pir ciiit. It seems elea!' that the only fan- way to estimate the prolils is to luliide tlit total m\ estnlent^ of the sliari holders. \\ hether iiat in\estmeiit apjiearsas capital or rest fund. In an attempt \<> di<»\\ to the Committee (iii Hankiui^- lid ConiMierce that the hanks are not making < \cessi\e |'io( its. as compared with other enter pi'i si s. .Sir I'jlmund "\'\ aii^( r iiad prepared one liunch-ed liaianci sliiels of as iiiaiiy typical cstahlishmciits excluding real (^tat' '♦:• t;! ~/ ■.-.if • "I [31 M()M:\ AM) BANKING iSi' \ i ■ 1 ? t! i rancliiun- and )':irmiii^ wliicli wt^vv funiislic'd h\ 'us- toiiiei-s of the C'aiiaditui Hank of C"onniit!-cc. 'I'iu-se .statements eovered the eariiiii<^' of estahhshments in 4'.> different Hne# of industry ■ranoinu' from eraeker fac- tories to eoal mines'": and repirsented an investment nl' ^TO.OOO.UOO. Thev \\ei-e. moreover, eoneerns of axerasi-e normal prospt'ril; . chosen merciv with the v\n\ in view of disc()verin' ■• pei- cent. 'I'hc (jucstion may also Ik re-^aidi-d from another point of view. 'I'he pr.itits made hy Canadian l)aid<> on the cntiix' assets which they control aitioiuit to l.i'O per criil. and ran.ue. in the case of IJie itidividmd h.-inks. fiom .!t:i to !..-)<>. If it iv c(.n>i(lercd that a hank could make on its capital and siirphis i\ per cent in ;in\ otlu r inve.stmeiit Imsincvs. then th-- pidfits ni.ade on their otli( r assets, v^hicli th.y control in virtue o|' Ijie peculiar fea- tures of llie haidxin^i liiisiiie-,s. wiiiild .averaue sonHuhen I'clw.rn .-J,-) .iiid :Ut per cru\ 'I'ha! iv to s;n . tin \ make •' I't'l"" niore tha,i one-(|uai-ter of (uie per c( nt profit on tJKir total .ismIs. if it is considered tli.it (i pei- cent m;iv '" aiiowed (III ih( capitai and sin-pliis e(pntril)uted hy the shanlioldt IS llu uiselv cs. This is summari/.:d in tin nm CANADIAN i};\NKING I'UOBLK.MS 15' t'.illouing table, iji which "capital"' includes capital rest aiui undivided i)rotits: l^rotit on B:uik Total As.^ets Conimcrct' ... 1.1! Doii.inion ... 1.1 t !1 iiiiilton ... 1.01 I li I'llilaga . . 1 ,,;7 liiipcri/il . , . \.:i6 Metropolitan. 1.23 Montreal . . . 1.0(3 M. rcliaiits ... I.j9 \!nlsons .... 1.-29 N.itionale . . . 1.35 Nova Scotia . . \ .36 Ott.iwa I.'JG t^R-bcc 1.33 Hoy, si 93 .-I inilard .... 1 . 1 ,' I'lronto 1. U I nion I .(I-,' Profit, After ■vllowingO'lj on Capital E;irniniis on Capital Plarning.s on .Market Price (.r Stock 1912. Dividend.- 01! -Market Price of Stock .1") 10. l.j 8.()1 5.07 .-25 7. SI 1 . 1 1 5.03 .18 7.11 8.10 5.39 .10 7.98 9.61 1.19 ..■JU 7.83 7.37 5.29 .18 7.07 8.18 5.03 O; 7.11 6.35 1.81 .61 lO.l.'i lO.O'i 5.05 .;io 7.7U 8.-27 5.31 .39 8.53 1 1.81 5.65 .22 7.18 7.10 5.05 .26 7.74 8.01 5.62 .30 7.8'2 8.93 5.3 .10 (i.lO 6.11 5.33 .-'!• 0.7-2 8.06 5.51 ■27 7.56 8.00 5.71 .'29 8.11 9.26 5.3 In view of all tlii< it is (■\i(lent that Canadian hanks •lie far from niMkinti cxcessixc profits. What ett'eet the present rate of dixidends and piofits \\ill haw in at- lraetin<2' "cw capital into the hankinii' field can onlv he surmised. New hanUs will nndoiihtedly he started; hnt they \\ill he sttnied hy people who will he willinu; t 1 wait for a rrtnrn on the capital in\ested. Xew I tatd\s ^cannot immediately earn and pay a dividetid. That is praetieallx impossihlc in Ihe.-i' days. Many hanks lia\e heen starhd in the I 'niled States within the last twenty years: hul lhc ■"moiu y trust" and are wockino tooethei- foi- the exploitation of the country. It is niaiiuaincd that the process has heen fur- thered hy recent hank amai^aniat ions. This |)rohlem occupied a ()(). ()()() '"'I'Tial (I.soy.i.u T.ooo.ooo No\,i .*^(()li;i .").<),")7.;5'20 l().8.'{().2i8 Doiniilidii J. .'!.')(). 'J'iT ()..'!,")(). •J'iT ruronto ;■■>.(>{)().()()() (i.OOO.OOO That the tcndcncx in i-cccnl years has heco to riduce the numher of hank< and to inci'ease tin n- si/e cannot he disputed. In se\(i-al easts the si/e of the liank Iris hecn increased hy amaluamat im; with it weaker institutions. Most hatdscrs at;ree that it is a n'ood tliiuLf to remoxc a weak hank hy mei';4inL;' it with a ^IronLiCi' one. 'I'liev lia\(' not hesitated to pid their tliccM'ics into practice. 'I'lu' n.Mid< of Montreal hasahsorhed tlu'ce: the Canadian Hank of Commerce, t'our: the liank of \o\a Scotia. two; and the Ho\al Hank. two. 'I'hesc consolidations ha\c heen fornud. Iiowi'vcr. witii the oh jet I of seciu'inL>' a sfron<4' chain of hranchi s throughout die whole country. CANADIAN HANKINC Pl{()l',l,l ..MS 4r>T I 'nr example, in llie rccriit iiuM-<4er of \\\c 'ri-adti'- liaiik and the Royal Hank the t'ornui' liad liranclus i-ontimd tor the most part to Ontario and the middle West, while the Royal was stioiif^iy represented in the maritime I)ro\inees and on the Paeitie Coast. The union of these lianks formed an institution with hi'ani'hes widely seat- tci'ed througliont the len<4th and hreadth of Canada. The hranehes were (]u{)lieated at fifteen points onl> : liiit as many of these points ai'c eommn-eial eenters already well supi)lie(l with hank-, it is hardly possihle that eompetition will he lessened hy the union ol' these two institutions. Now, in s|jite of the eritieism aroused l)y these merg- ers, it is noteworthy that the Canadian hanks have ex- panded in all direetions in recent yeai's. Thi> a])|)!i(.'s not only to their increase in capital hut also in the facil- ities for haid\in;4' <'tfered to the people. This has hecn due to the i'ai)i(l di \clopment of the country, and to the lai-<4e capital in\i'stn)ents that h.ive hecn made. The iiumher of new hi'anehes that ha\e hecn estahlished in all dii-ections is certaitdy remarkahle; and the ma |oi-ity of these hranehes l!a\e (piickly justitied their estahlish- iiietit. Hut. .so far from hein^- tnie thai the h, iiks ha\e foiMned any sort of ti'ust. many parts of the Dominion -eciii to ha\e evi'ii excessive hankin^' accommodation, riie hanks themsehcs have f( It the prcssuri' of this com- [jetition. and aiv not rushin;^ into new tt ri'Itoi'\- as thev did a year oi- two at>(). 1 1 is desirahle th;it hanks, heforc !'! ancliiii<4 'lul. .should iiioicMiyliK- salisfv llieiii>el\e< of the need of additional hanking' f;iciliti(s in the new dis- tricts; otherwise, as has hecn said, undue com|)et it ion is the result, 'I'hi^ i-aiscs discount rates in the end and causes the hanks to undertake undesirahlc hiisiness. The 1 ■ MONEY AND HANKING V-Pi danger at tlie present time is in the undue niultlplicatiun ot'braneh hanks, rather than the reverse. If the hanks, especially in the West, wijuld uork more in harmuny with one another, it would result in more reasonable banking rates and I'aeilities for their customers. In order that the pnhlie interests may be safeguarded, however, the Act of 1!>1.'J provides that ikj agreement t)y a bank to sell the wIk^Ic or any porti(jn of its assets to another bank can be made luitil the minister of tinance tirst gives liis consent. Mr. McLeod. late general man- ager of the liank of Xova Scotia, and others as well, maintained that the assent of parliament to a |)roposed merger should also be secured: but the precautions taken \vould seem to be suthcient. If the matter became pub- lie and were discussed in parliament it would manifestlv prejudice the jjosition of the bank that was selling out its interests. An attempt would be made at (Mice l)v the ftther banks to get part of its business: and, as a result, it is extremely douotfnl whether the agreement could be put through. And there may be gXHxi reasons why it should be put throngh. If a bank gets into a bad eoiidition. it is sometimes necessary that it should be absorbed by some other baid<. thus sa\ ing the ])ublic from the shock to business that would arise from a bank failui-e. That j)oint should not be (»\erlooked, for it is important in considering the (|uestion (if consolidation. o'-U). lirtuicJns in foreign cotintriis.- The Canadian banks ha\f taken achantage to a c-onsiderable extent cU' that pro\ision of the law which p< rmits them to open branches \\\ foreign countries. A\ tin ( ikl (if WWl they had I.'{ branches in Xewfoundland and Wl branches else- whcie principally in the I'nited .States. Mexico, Cuba and tli( Mntisli West Indus. On the whole, this has resulteil in alfording fail' facilities for the extension of CANADIAN HA.NKINC; l'R()l?T.F..MS 450 ( iiiada's trade. Some o|)])()siti(»n has develoj^ed against 'his i)()licy, and pi'oposals lia\e arisen to tax capital loaned by Canadian banks in t'oreij^'n countries. For- tiiiiatei\-. at the hite revision of the act, this sno-o'estion was not carried into eH'eet. Xolhin^ conhi be jjained by la\in^' the funds ol" banks employed abroad. i\)v the i'lisines'^ that the banks carry on is to the direct advan- taue of Canada, as ueii as to the banks. Vov example. the Koyal Haidv went into Cuba in 1H'.>1) and now has I'.t branclKs there. In IHOI Canada's imports from ( uba amounted to .$.'J4.*J..'}74 and exports to ^.578.013. Ill r.>l'2 the correspondiny, On the c-ontrarv, de- |ii).sits thei'e are in excess oi the loans made. 1 1 would, tlierefore. for this reason among man\ others, be un- \nse to discouia<_!,e Cana('ian banks froui opening up liranclus in these islands. The \ation;il Hanks of the ( nited States are now permitted to establish bi-anehes in loieign countiies. I lad tluy always bei n al>li ti. do >,(», llie foi-eign trade of that country would bi' greater than it is to-day. It is estimated that -S'JOO.OOO. ()(>() of Anu r- lan ca])ital i^ inxfsted in Cuba alone: but it is the Canadian lianks that baxc lakt n greatest ad\antage "f the opportimities of1'ere()<). 'IMicsc loan> arc \'i)v the most part made in tlu' City of Xcw Yovk. 'J'licy ha\c often hccn severely critici/cd: hut. on tin wliolc. this ])olicy can he jiistilied. It is necessarv to keep a coiisiderahle part of a hank's k)ans in such licjuid ioi'ni that they may he rcali/ed n|)i)n in anv emi r^cncv that may aiise. Dni'inu' the tronhle of IDOT tlie foreion loans saxed the situation in Caiiada. \\\ [hv (.iid of I'.lOT the Canadian hanks had exhausted all the moiiev l)e- lonoitio- to them ahroad. and had imported out of tli( (lc|)osits in othei- coimtries s-j.sn .(»()(). 'i'lie hanks dn not lend at call in \e\\ ^'ol•k to secure exceptional pi-oj- its: hut chielly to pi'cnrx e a cei-tain poi'tioii of tlitii' loans ill a hio|,|y Ii(|iiid fomi. A< a laile. the l)anks lend money in Xeu York at a much lower avcraiic rate than in Canada, 'i'he jiioh lates of interest, so often rar to year, althoutrl) tlie\- may lu payahle on demand. Now. such loans should not he considered (piick assets: they are not meant to he .such hy the horrower. and should not l)e considered so by the hanks. Then, aoain. the hanks have nearly always a num- her of loans on stocks and bonds cai-ried by "princi- pals." That is to say. the i\cri to men of sti'aw : and, as a re- sult, the l)aiiks ini<4lit find llieniselves owning the enter- ])rise. 1 )urinn' I'ccent years Canadian institutions ha.\e aete(| as hankers for laru'c in(hrsti'ial undertakings in Mexieo and in South American countries. They have heen named as such in the ])ros])ectuses of tliese corporations; hut. strictly s])eaking. this has meant nothing more tlian that they have lield the I'unds ol' these eom])anics. Of course, the hanks have also advanced capital on undei- writings oj' fliese cor])orations. l)ut not in the sense that they ha\(' pro\ idt'd the initial eapitak l-'or example, the Canadian Hank ol' Commerce niade loans on two very important underw ritiiigs made in P'.ngland of the Hio and Sao Paulo enterprises. 'IMie loans \\ei-e niade on Canadian nndci'u i-itings in connection \vith these com- ])am'es: under\\ritings of a class that were actually ])lace(l on the market. The lai'ge Canadian lianks arc always willing to lend money on good underwritings when funds ai'c plentiful: .just as they make loans, on securities alone, to financial houses in London and else- where wlio aie ahle to covenant that when the payments due on the undci-w I'itings are made they will re))av the l)anks. That is considered ordinary banking husiness which the larger hanks like to get. lU'garding the South American enter])rises as a whole. Sir Edmund Walker has stated that Canada its<'lf has little of its own capital in them. 'I'he money to huild the entei-])rises at Rio and Sail l\uil(> was found ii' Kngland. Helgiuni, Switz- erland and thi'oughout the contineni of Europe. The Canadian haid^!».()()l».H(;r. Canadian imim'cipal securities and Hi-itisli and foreiuii public se- ciwities. J^-J.'J.H-JTJil.'J: railway and other bonds, deben- tures and stocks. •S(;7.()21..-)41. The l)anks have, there- lore, a considerable and direct interest in many inchistrial enterprises. .y.ii. Loans to dircctors.— Vudvv the act the share- holders may make by-laws linutin<^- the amount of a loan to any individual or corporation. As a matter of j)rac- tice tliis is left to the directors to decide. In the Tnited States national baid-ly opposed by the banks and failed to carry. An effort was made, too, to place a limit on loans made to the directors of banks; but this amendment was also defeated. It is true that several small banks have failed be- '•ause the chief executive ollicers either misai)j)ropriated iir speculated with their funds. Hut that has hai)penc 1 generally wiiere the institution was a "'one man" bank. In the case of the failure of the Ontario Baid< the «'en- ' ral mana<4er speculated with the banks funds in Wall Strri'f- mihI flic /lii-<.<.f.' It ,.!..> .,\\...v..A ^.. 1 1.^, - ■ . : ^ • : . ..,..;. ; ,,^ L 1 i • i -^ ^ liM'ent in safeouardiiio- the bank's interests. The Sov- ereinjn and the Farmers" Hanks were forced into liciui- 460 MO\F,V AND RANKIXC; (lation tlirounli exces-iive and speculative investments made npnn tlu- authority of the directors. However, all these I'aihires occurred i-atlier tlir()uan\ should not also ha\e a seat on the board of a bank. Xor should they Ix.' discriminated afjainst in s-curinu a lf):m I'oi' th-.'mselves or the eorpor.-itions in which tluy ha\e an inleitst, provided, always, they rccei\c no favors and tliat the loans are leuaily made. As nas been said, ro limit is pliucd in the act upon the amount of a loan to any person or cor|ioratioii. |! appears to be the ^encr.'il consensus of opijiion ;uni>nL; bankers and business men in Canada th it nothinu' of am CANADIAN IJANKING rilOBLKMS i07 ■••tu \;ilue is p'ained by .such restriction. Mr. TI. C. McLcod qiajTested to tlu> C'otiimittce on Hanking and ("oinnicrcc. (Ill the occasion of the last rc\ ision of \hv act. that a limit of 2.5 per cent of the haids.'s caj)ital should he im- ! (vsed. The sufjofcstion met ^^■ith some aj^proxal: hut. the \\lioh'. it was felt that any hmitation upon loans \MiMld not he in the hest interests of the hanks oi- the {ountry: and that, in any c.,sc. it would he dilticult of (iiforcement. In a word, it is i'elt that fluidity and secu- I'ily are more imi)oi-tant than tlu- mere a-nount loaned. .Y'i.'i. Haul's ami the trust ct iiipanicft. — Some of the Canadian hard; <^i\en reasons why this policv ap])eals t the hanks. Tjie Canadian Hank nf Commerce has not estahlished a ti'usf conipany. hut it ha > at times hecn inclined to do so. This hatd< has nearly !^"J. ()(»(». ()(»() in pension funds helonoinn- to it- otfii'crs. which is larj^cly iii\est(-es in wcsfci-n farm lands. It oh\i- (Uisly iinohcs much labor in looking- after such lai-^e investments. Such a fund nnnlit well sfr\(> as a foun- (Lition for a small trust company, in l-aiM-land. espe- ciidly. many investors come to the Canadian Hank of Commerce v, ho \vould like to \( ]\(\ funds on ucstei-n faifus ill Canada, and in other ways. These tr.ansactions ean- .lot be undei-t.aken under the bank act: and therefore a cdnsiderablc amount of profitable business is lost. Other Canadian banks found themselves in the same condition. iUKJ or«ianized trust companies to take care of this class iif l)usiness. Of couise. it is another \ tli< l»ank act. Aside from tliat Ihei-c dors not a|)pear to be an\ it asnn why m ili ^ 468 M()^l:^ and haxkint. th'J hanks should not or^aiii/c ti-ust coinpaiiirs and IkiM stock in tlicin. Tlicix' is no reason why shareholders f>\' a hank siioiild not permit the formation of sueh a com- pany, and ^u in<4' to it the husiness that cannot l)e legally undertaken hy a hank. It has hei'ii c'harj^fd that the direetoi's of some of tin ^. anadian hanks are also directors of tlu'se suhsidiaiy companies, and that they exei't an undue inlluence in ><- cuiin. I nil rest ch/ira.'i-'^ in tlic Wist. The act permits haid<■_',"). I'lii axera^c r lie. Iio >m M to I •_' j)( 1' (■( nt accord- in;^ to t lie (list r lets w Iieic tlu hank is located and the p< r- .son who receives the loan. The people of tin West feel that they have a griev- aiue in t!iis, and lia\( souaht to h;u( the late fixed .it f^ ( ANADIAN HA.\KI\(J I'ROlU.ll.MS 4G9 7 jK r cciit ill all {'ascs. It lias liccn c'niisc-i-\ ati\ rlv t-sti- iiiatid. li()\\c'\rr. that it costs on an a\(.Ta<>c 2 per cnit iiioi'f to can-v on liankiii<^- in the \\\'?t tlian in tiu' Ivist. On tiu' IVontiir and in the rciiiotcr districts tlu- ditl'er- Micc in cost is niiich liinlicr than that. At oiu- time the li.iiiks were chai'^inji' - !><■ I'f^'nt a nioiith in Dawson ( il\ : ;uid cvtn at that, money was. i'elatl\ eiy, the chea])- I ^t coiiimoihty there. Ol" coiirsi- this is an extrt-me case; il the ^'ciieral pl'iliciple holds true. The cost of sei'\ - is ninch liiLi'lier in the West, and thi' risk is <>'reater. l,(adin,n hankers ha\i' insisted that if the statutory rate <<\' 7 p<'i' ct'nt wvvv enforced many of the hraiich hanks udiiM ha\'.' to he closed. Mort<^-a^c and loan companies recei\e 8 oi- per cent "II thiir fiiiKJs; and the cost ol' cxecntiim' the inort"'a<''e ''! iiius the loan up to 1 1 - or 2 per ctiil hinher. .\!4'i-ee- iiK nts for sal( yield as hiuli as If. per cent and moi'c >ii the money iiixcsted. Impliiiient dealer^ ehai'yc 1 •_' |ii r cent on tlii'ir customers" notes, and these ai'e made III at credit p'-ici's. .Moreo\ ci'. there are not onl\- vearl\- i'lil s( asonal !hietuations of interest i-ates in the W'e^l. W li< n thesi' facts ai'c considci-ed it does not appear that 'lu haiik^ are charuin^i (,\eissi\c I'ates. The crux of '!• (iiieslioii. therefore, is this: |^ it to the ad\aii!aLi'e I I Ihe West to lia\e money at ])re\ ailing' I'ates rathei- II 111 run the risk of decrea^inu' the sn|)pl\ of capital h\- .'ihitrarily lixiny- the rate of interest' It would not In- praeticahle or just to impose a fixed ?-ate nf 7 per cent II till' hanks without rcslrictiiiLt also the rate charwfd hy otiur tinaJicial institutions. An i normous amoimt ol" 'ipital has come into Canada m recent viars from (ii'cat Mritain. Holland. I'ranee and oIIki- l-'nrnpi.'in enuii- trii's. A tixi'd 7 p'l' ceiil inlii(^l lali- would neccssaiaU' ■ iU'ect this flow of ea|>ital. and I'cdiicc its \oliime. The 470 Mo^■l;^■ and banking legislation would (k'l'eat its own (.'nds; foiiipctition woiiM be (limiiiislied. and as a natui'al rrsult interest i'at< - would rise liiglier than ever. Tlie situation will gvml- iially riulit itself as the ci pay his aceomil when din' is charged fJ per c( iit for i'iiu\\al. 'I'he baid\ "ttempt^ S.S ^-* ( ANADIAN BAN KING PROBLEMS 471 to keep its loans liciuid: it does not want to go into ])art- iRTsliip '«'. itii the borrower in a rural distriet. The evidenee given hy the general manager ot this hank has gone to show that the rates are in general less, under similar eoiiditi()ns. than they are in the Tnited States. He agreed witii Mr. Forgan. president ot the 1 irsl National Uank ot Chicago, that the hranch hank- iim system can o])eratc more eeijiiomieally and turnijli hanking facilities more cheaply, as a general rule, than the independent, local bank. The small bank ot limited lajiitalization could not compete with the large bianch hanks. Mr. Powell, from his American experience, saw iiiit one adxantage in I'avor of th« local bank. The !e dissatisfac- ti(.n has arisen among Canadian depositors because the banks do not pay greater interest on deposits. The ordinar\ rate on deposits is :} per cent, although the W. vburn Stcuritv liank pays t per cent. This rate 47-2 MOXKY An I) H.WKIN'C, ill 'U? c'onipiircs t'a\()r;il)ly v.itli that of hanks .similarly situalid in the I'nitcd States. The C'hiea^o hanks, for exani])li, pay '2 per eent on daily halanees of eonnti'v hanks left with them. They do not |)ay interest, as a rnle. to a cns- tomer who makes arrangements to he a horrowinn customer: hnt if they ha\e a lar^e account where the cus- tomer does not want to l)oi'ro\\'. and wheiv he is essen- tially a depositoi', they de(hiet a sum which must he in- terest-free and which w ill meet the expenses ol' carryinu the account. j)ayini4' - pt'r cent on the halance. Of course in active centers as much as 1- ])er cent is paid on deposits, principally iiy trust companies. A national hank undei- normal conditions cannot pay more than .'J ])er eent. although in some oi' the Western States 4 ))er cent is |)aid. ()wiiiainst, so ^reat is the comjKtition to sei-urt' additional i)usiness. There is no olliei' coimtry in tin world wlier< service of this kind is pro\ ided to such a deni'ce foi- noihin^". Persons kce|)in;^' an account of lifty or sixty dollars arc j)ro- \ ided with a check hook and complete hankin*:!,' I'acilities. The cost of tliis s( r\ ice is ahont .'{ cents ])er check in the castci'n ollices and .'{' o cents to .1 cents in the West. according as tlu cheek is drawn uixtn a citv or countrv ollice. It is iiue tlial in Ih' Ivisl. es|)eeially in ilu' maritime pi'o\ inces. tin deposits exceed the loans, .-iiid the surplu<« is sent to other pai'ts of the Dominion where there is an active demand for capital. It has e\cn hten suj^- gcsted that the deposits of a |ii or (i j)er eent. which affords the bank merely ;i fair retui'ii u])on the cost ol' the sei-\ ice rendered. y.iU. FiiKiiiciiii:; tJic crops.- The obvious i)eculiarity of agriculture is that, o\vin<>- to tlie charactci- of the Canadian chmate. but one crop per annum of a ^iven kind is harvested. The siidar staple crops of the (ountry such as wheat, oats. flax, barley and others, is a siasonal operation. 'I'his is the one im|)ortant fact wliieh distinj^uishes the tinancino- of ajj,iicultui'al operations iVom that of manut'aeturini^- and commerce. In regions which are mainly agricidtural. the seasons of the year \\hcn the products of the soil arc bein<4' marketed, are the seasons when large calls are made upon the banks for loans. 'i'here are few lines of industry where anythini<'J(). 000.000. Part of this has been furnished in Dominion $4 and «.3 notes: l)ut it is altogether likely that, for the future, the banks ^vill pirfer to issue (july their own notes, as these can now. through the gold i(ser\es. be |)rocure(l as easily as Dominion notes. Fresh supplies of notes are prepared by the banks Hi the summer, and an estimate made of the amount reciuired at the different branch oltices. (H-ain-buying firms arrange a line of credit at the banks, and at the time of del'xcry of the giain at their elevators, secure notes from the bank to make the re(iuired payments to the farmers. x\s the grain is bought it is j)ut tlirougli the eleva- tors and loaded on cars for Koi t William. I'ort Arthur oi' Duluth. the terminal points on Lake Superi(jr, When tjie grain is loaded on the cars the grain-buyer receives from the station agent a l)ill of lading for a number of busiiels the ca|)acity of the cai'. 'I'he gi-ain-ljuyer turns these bills over to the hank as security for loans made to him. The bank loan grows steadily; each (hiy luw re receivcvi :d .. lv...,,,,.l. ), .wl ^iippiics oi iii''ier> ; issued to the grain-buyers. During this time the grain is on its way to the lake pints. From time to time the '4i!i 4; 470 MOM ^ AM) H.\\KI\(, 1 > hi- ■ ,1"- \niyvy .^rlls to Winiiiprn- exporters, or lo tlie hiu' „,illi„n companies. He draws a .IraTt upon tlie exporter or tlie luillino- eoin|)any, to wliieli hills of ladiiiu' -'ire attaelied I'V Ins hank. 'Die hank applies the ai nt of the draft f" the loan made to the ,uraind)nyer: and instrncts its '"■-•I'lch at W'innipe.u'. to which the draft is forwarded, to (icHver the hills of ladin.u and insnranee receipts to the e\|)orter or miller, as the ease m.ay he. onlv on pay- ment iA' the draft. As deliveries .if urain "from the farmers cease, the (k-mand tor the haid^'s notes slackens: and t!ie -rain dealer's indehtalness falls. 1 f a firm does not ncl out its oiviin htt'oiv navigation closes on the lakes. It may stori' it in its elevators, prelerrino to keep it until the sprino- rather than ship it to Portland or St. John l»y the all-rail route. In that case the hanks may carry iiic dealer all throunh the winter. In addition" to th"e '•ountry huyers the aueuts of the Winm-pe-- exporters antl of the hio' millers will he huyino' from the farmers. This husiness is financed in the same way as that of the small oTaiu firms, hut at \\'innij)eo' hanks. Jn W'innipeo' and other cities the l)io' exi)ortino. firms send out lar-e amounts of cash to the centers at'^whieh they havi' elevators. They also acce|)t the drafts drawn iipoM them hy country deak'r>: so that their indehtediiess to the hanks is constantly increasino-. 'rh^ security for these haidv loans consists largely of wjieat in store at lake ports. Jiy sales and shipments fiom lliese points their accounis at the hanks are li(|uidated. W'iien a hoat- l'>.i I.,!..,, hTu of ladinn- is. of course, ixclianovd for an ocean hill of •'"•'"f^' ''^ *li^' l'<'i"t <••' ^Iiipment. When the sterlin- (•A\.\1)I.\N HANKINC; 1'H()15M;.MS 477 liill i)[' I'xcliaiiu'c is drawn, with in ocean l)ill of lading ,111(1 insnraiift' receipt attaclied. the l>ill is iisually sold ill .W'w ^'(M■k. Thus the hank and the exporter hoth lia\e theii' money. The hank notes u'radually i-etnrn to the hanks as the farnieivs and the merchants settle tlieii' acconnts. ^Vn (Mormons credit hnsiiuss is cairied on in Canada. esj)e- eially in the West. When these accounts are settled the notes, as has heen said, gradually return to the ))anks eitliei- to he deposited or to pay ofli' loans to the hanks. 'I'lie notes thus I'orm an elastic medium of exchanu'e. expanding' and contractiiif^ as the need re(]uires. They cMst tlu' hanks \ei'y little, aside from the expense of piintin,!^' them, exeipt in the cast' of the tax on the u!ieo\ fi'ed enR'r<4enev circulation. That tax is not paid until the notes are actually placed in cii-culation : hence, they may he held as till money at a trivial expense. 'I'his is an ad\anta^e not generally recofrnized: hut it results in \ery lar^e savings to the l)ank. .")41. C'onninrcidI letters of credit in CaiimJn. — \\Miile the })anks ])lay a \ery imj)ortant pai't in the way just descrihed in the export trade, they play an ecpially im- |)oi'tant I'ole in aiding manufactureivs and wholesalers to lii'ing goods into Canada. Indeed, one of the most im- poi'tant functions of the hanks is to facilitate the impor- tation of merehantanee of the draft. As the first iiK-thod might iinolve loss to the C'a- nadian importei-. so iniujit the secoifd to the Knglish exportir. It' the Canadian customer wvvi- unknown to the exporter the ordei' would, no (h)uht. he deelinefj: be- cause, if his (haft were rtfused. he would he compelled to .NKM-ifiet- his goods at foiv id sale in a strange country. Credit relations of this sort are usually arranged in ad- \ance. But even if the Canadian .should he a highly trusftd customer, the exj)orter in Spain. Italy, (ireece or (.er- many would have to i>ay an exceptionally hi ' rate if he wished to discount his draft on a Canadian I, same holds true to a less extent for the Knglish expoi , This would, of course, all'c-et the ])riee the exporter could <|Uote. to the dis.uh ntagc (>f the CanadiaTi merchant. (3) The most .satisfactory method to all concerned, as Avell as the one most usually employed, is the use of the commercial letter of credit. When a merchant or nianufacturei' wishes to impoi-t any considerable quan- tity of goods he applies to his bank for a commercial letter of eredit. In the ;ii)plication to the bank, he gives full j)articu~ lars with regard to the name and address of the exyiorter. the terms of the draft to l»e drasv ti in pavment. date be- fore which the goods must be shipped and their destina- tion, total amount which may be drawn, also whether the goods are insured liy the exporter, or in Canada bv the importer. Then, when the ai)]ilication is granted bv CANADIAN l{ANKIN(i l'R01H.r.M> Hi) to ill.- liMiik. \\\v customer receives a letter of eredil wliuli I, t'oi-wanled with his order. 'I'liis letter of credit iiiithorizes tlie exporter to d'-aw .,11 the London aoviits of the hank or its an;eiits in any othv'r eitv. np to. hut not exceeding, a certain amount of pounds sterling. Such a draft must he aceompani((i hv a certified invoice and hill of lading made ou^ to the Older of the hank, for goods siiipped to the Canadian ciistonier, according to the terms of the letter of credit. \V1 en the e\i)orter ships the goods he draws on the London bank: and j)resents the draft with the relative tcunients attached, together Mith his letter of credit, his own l)ank. The hank will at once discount the hill, and the exjjorter thus receives his money even before the goods mav have left the coimtrv. As London is the clearing center for Kuro])e, docu- iiientary bills of exchange are discounted at a very low rate of interest. IJoth the exjiorter and the importer gain by this ])rocedure: the former receiving his money without risk of loss, and the latter getting a better price ijuoted on the goods lie buys. i'h.e Cannd'i-n bank has. in the meantime, forwarded to its London branch an exact copy of the letter of (ledit; so that when the branch bank has presented i • it the draft, with the necessary documents attached, it at once accepts it. The documents are then forwarded to the Canadian branch which granted the credit, to- ffetlicr with advice of the date and amount of the draft which has been drawn against tlie credit. The Ca- nadian customer is then notified that the bank liold^ the bill of lading, etc.. and that he may receive these bv meetiniT the amount due upon the draft. If the draft drawn by the exporter i- t sight, the equivalent ('\' the amount will be charged .n once against the cus- 'J ISO MOMA AM) I5.\NKIN{; tomci-'s ac't'oiiiit. The (locuiiiciits .U'iving title to tlio goods will tl'en he turned over to him. But if the draft should not mature for some time, the customer must execute a trust receipt hefore he can gain possession of the merchandise. In tliis receipt he ])le(lgcs himself to hold the goods in trust, as the j)roperty of the bank, until the (h-aft is ])aid. In this way the letter of credit })lays a veiy inii)ortant jiart in the carrying on of the country's ini|)oi't trade. .■>l'-'. ('(iit,i;i7,i.'8<) 4 ns.uf) 5 .I.TO.^.'.'.'i'J .'50 1 5. .'{()() H)() 7/200 ■"'(>() . 2,07 i.OdO i.<»(i() 5,sn,ooo .'500 IrfT.iM' lult r iiotrs fnr li.iiiks .'fHri.OOO 1.000 lcjr,il-t( lulcr nods fur Ivitiks '2,08i,l)()l) 5,000 lrgal-t( ndiT i\oUs for limits 7.5,7 ^.5,000 It will f)e recalled that upon the lirst !i<;}(),(M)().(M)() issued the g(>\(rnin(rit is ohligcd ti) rnaititain a 2.") |)cr _ I _ _ : ,,_, i' !,! ,,_,,! „!i: _, , i . ! i-'i-iii It .Svr\'t" liiiitie 'ip i-i giHii ()(). ()()(). in o()l(l. Notes ;ih()ve «.'J().()()().()()() are issued only on a ^old hasis. The specie held on Ai)ril .'}(), i;n;3, to fnlHU this ohliga- tion anionnted to .$«;j,74(),7.'j:j. It will he seen, there- fore, that the Dominion notes are, in reality, gold cer- tificates. The act is jjlainly inodell'd upon Peel's Act (if 1814, which perniitted the Haiik of En-^'land to issue notes up to a certain amount on securities, and heyond that ])ound foi- jxiund on uold. The hanks are ri(|uire(l hy the government, under the Urms of their chart rs. to kiep 4() ])er cent of such re- serves as they determine to hold, in Dominion notes. 'I'he hanks i)uy these Dominion notes with gold. From the goverinnent statement it may he seen that on April .'{(), im;}. the hanks held ahout .S7S.()()().()()() in large legal- !i ikUi- notes, which are used in jiai't U^^ reserves and in p.irt for cl(;ning-house purposes. Ai.. .', >< I. "),()()().()()() of the rest of the Dominion notes i- used hy the hanks as till money, Iea\ ing oidy .S-J(),()()(),0(K) in the hands of tlie pe()j)le. As has Ikcu shown, against uie paper moncv of the Dominion the vaults at Ottawa contain somewhat more than $!»1.(M)(».(K)() in gold. Many linancial critics have iiiiiintaincd that this is an excessive reserve, and an utter \\;istc of a great amount of capital that oug'it to he out the world doing husincss. It is said that conditions II n( \(r ai-isc in Canada, sjiort of its con(|ucst hy a i.ireign foe, in whicii government notes to the extent nf over SI(M>,()(M»,(M)0 vvouhl l)c presented at the receiver- U( neral's oMicc with a demand for gold. The critics of ■ :,v pit"".; I'il j;;:iii y ili.'i liitiiiii liiiir iiii iiSt V\i i.,u K ui iiic Dominion notes might he placed at .50 per cent of the i^-sue, instead uf practically dollar fur dollaj- in gold. Ill 1.1 m J i <3 i Jl la 484 MONEY AND RANKING This would reduce the amount of idle /'old l)y $-il, ()()().- 000, uiulei' present fotulitions. It' the \a\v recjuirin^ the banks to keep M) eeiit of their reserves in that case remained as it is, ihe gold lield against tiie large legal tenders in possession of the bunks would l)e redneed fiom $7H.()()0,0()() to .^.*{9.()()0,00(;. The further suggestion is that the ."^.'{D.OOO.OOO in gold ^hould he used to reduce the national debt or s])ent by the government on na- tional works. In this way the national ))urse would gain j;t least i^l .'JoO.OOO a year in interest, and the banks A\()uld still be amply secured against any eoneeivable (!< maud foi' gold. Xow, the chai-tered baidxs held on May '.M. 101.*), in round numbers, .S-1.(),()()0.00() in spirie and $J):},0<)(),()()0 in Dominion notes. If they held inci'ely !■(> \)vr ci-nt of their cash reseini's in Dominion notes, it would amount to .$.5;},0(»0.(I0() only. As a matter of fact, however, they keep siune SK». 000.000 of Dominion notes in tin ii- reser\es more than the law re(|m'res. 'I'his they do be- cause of the ease with wliicb legal tend<'rs can be .sent to the dill' I'eiit bi'anch b;inks foi- use in their reserves. That tluy would contimie tn d'> so i!' the law were changed in the maimer descrilxd is more than doubtfuL If Ihey reduced theii' holdings of legal tenders to the amount that the law prescribes, that is, to !t^.")."{.000.- 000. the government would gain in intei'cst only on ;iii i.s.sue of about •'^•JT. 000. 000. ;ts far as the large legal ten- ders ai-e eonc( rued. That would be a paltry gain in icinrn for tluenh ninn the gold reserves of Ibis eoimlry. already tno srn;dl. .\nd despite what has been said by those in f;i\ or of the plan, the n( w order of things would I i.i«^ .. . .... — MOl HiUKt. iiii i/Oniiiiiuii iioits ;in ^^(loii ;|s i4oi(i. f\ 1 1 doubt in normal times llu \ would continue to ciriulati' at ])ar. as long as tlity were payable on demand in gold. TIIK HANKS AM) Till" (iON l.HNMr.N'l" 1^ and as 1imi,!4 as tlit jjeopk' deinaiKkd lliciii as a im-diuiii 1)1' (.-xchangt* and Hie hunks conliniK-d to use theni in • tlnii- ivsLTves. Hut if the 41,- .V.>7. .\f^a!nst this the haidss held in k^j^al-tender money ■^ I ;{.■{, l.'}.*)..'}!"-*. This sum was eomposi'd of nol,! and 1( oal tender notes piaetieaily «^'o!d. Now. if the u'ov- ernment should hold in ^old a reserve of only .")() per (■ml a^-ainst these notes, it is plain that the position of llie haidxs. as well as of lh<' eountr\ . would l)e wi'aki'iied. I )niiiinion notes arcworthless for intrrnational exehan^e. althouiih they are a full le^ai tender in ( ;ma1.'{. said: "'rhe hanks have been given a monopoly oi' the haidsing husines- of the country. In addition they aiv j)ermitti(l to issue currene\ to the extent of their paid-up capital at no greater cost than that of the engraving and ])rinting. This amounts to a virtual gift from the government of ^100. ()()().()()(). 'I'his currency is not suhject to a tax of any kind, and instead of iieitig secured hy gold nr goxernnicnt bonds il^ is se- cured hy heing made the preferred creditor against tlu' assets of the })ank."" This statenuiil is txpical of many similar criticisms. It is hardly neees^^ary to draw atten- tion to the fallacy that tin- government conlrihutes -SlOO,- OOO.OOO to the hanks, hy permitting them to increase their lialiihties to that amount, lint the (luestioti of tax- ation, which comes up again and again in (':!nada. de- serves some considci'ation. It is true that the lederal goNcrnment dot's not tax the hanks: iml llicy paid in the se\ti-al provinces in li»]'_' ahiMit .SnT.ii'H) h\ \Ka\ of taxation. This takes no account of local ta\(s on red tstatc and special licenses and fees in certain citiis. I"or ( \ample. Halifax charges each l>ank $1.(100 yearly and I If. of 1 |)er cent U[)on i!i<' axerage \iilimie of husincs> done . including ;dl 4-' r THE BANKS AND TIIK GOVERNMENT 487 loans or investments and current and savin(?s deposits. The niininiuni so jiayable is $7.'}(); but a bank may eom- nuite for its I'ees and taxes by paying $;J.()()0 yearly. In St. John. X. IJ., a munieipal tax of 1/12 of 1 i)er cent is imposed upon the average vohime of business done. as in Ilahfax, X. S. In .Montreal a s])eeial license of S(i()() is exacted from each head oflice and if^lOO from each branch. In Quebec C'i^v the mumcipal license is SI, ()()() with $2()() for each branch. Montreal also im- poses a tax of 7' 2 ])er cent on the rental value of the hank premises, aiid Quebec a similar tax of fJl- per (■(lit. These taxes are in addition to the real-estate taxes. Ill Ontario the law ])rovides that banks shall be assessed lor a sum etjual to 7-) i)er cent of the assessed value of the real estate occupied. On this sum the local rate of taxation is levied. This is. of course, in addition to the local tax on real estate. This tax does not amount to as much as might appear; for the assessment of real (State in Ontario municipalities is much below the mar- ket value. The banks in Toronto, therefore, do not i)ay nearly as heavy a tax for local purposes as those in Montreal. Talking the i)oi)ulation as given in the 1011 census, the number of inhabitants i)er bank for these five cities is as i'ollows: ' fi I'opul.ition Toronto .'i7(i.'2K) Montreal l()(l,l!)7 (^i.'Ih'c TH.'XiT Halifax «■(;.(;() 1 .St. John i'.'.i!);) NmiilitT (if I'tr- Bank Offices suns to 15 ink U.-i 2,.)!>t !)7 4,806 '.H\ .'<,()() -2 !',> 3,88-2 IH 2,656 Tt IS ;tvo !)• Die that the lieaiv taxc in ^Montreal have ha();i.()81. 1 I'J l.l:it lO.S.'il!) ().") 'J.jl 1 C^.',•29^ t-j l.lS.'i ■-lii.tT!) .-no l.liTtl BANK OFFTCE.S IX I N( OHPORATKD TOWNS i'ro\ iiu'O Mli.rt.'i Nl.niitoha . . . . ."^ isk.iti'liewan Xo. of Hink l'o])iilitioii Towns l'o|iulition OHiecs to Hank '27 'J,-).S,S1 r>r) \-~\ ■2t 'i().!)'2G 47 r,i:i 51) .'57..")01 97 '587 <)<).;! I 1 !!»!» 1,V1. 15ANK OIFICKS IN INt OUPORATKl) VIM ACiKS No. of Trovince Villafri s Allurta 8-2 Manitob.a '21 ."^ iskatc'liewaii .... 1!);' I'o])ulation 2(5,779 10,190 ;5l.,")9() 298 6a, .')().' Bank Ortic.-s 70 20 l.-.l '2 11 Po))nlation to Hank .'iS.'i 509 209 28i Tlicse fipfures sliow tliat a tax on note ciirulatioii vvdiild foiTi' the banks to do.se many of tlu'lr olFicos in ll:c ^Vest. While, no doubt, tlie ])anks have a valuable iianeliise in tlie power to issue notes, tliey a|)])ear to be giving' a suttieient return in serviee. Xo other l)ank- iiio- system in the world ean show a better record in briniriiijr banking- faeilitie.s close to the people, especially ' . il- „ i. ] '. I ..! ^.t .. \ fii-v- i\i\ /■! l*r •! l1 ') f w U I H'Mlll/l J i i i I iv." Vwl • I i I ; '» ; ; : ~ ; : ;^ "^ ~; . - - ■--.-- • -: ! result merely in im])airinj2: the s<'rviee ol' the banks to !lie people: ;uid in the last analysis it would be j)Mssed on. 490 MONKV AM) NANKING fe ill })art at least, to the eustoniers ol" the I)aiiks. Vvn- posals to tax the eii-eiihitioii of the hanks, therefore, are ill-timed. W'liat is wanted is not only inoix- hank offices as the eonnti'v <^i'o\vs, hnt more money a\ailahle for loans in the West. .More eapital is needed for C'a- nadian hanks; and that is not likely to he seenred if it is tliou<.>ht that the i4r)\crnment intends to restrict hank- ing- o])erations thronf^hout the country. .54.>. Mont/il// stdtfuicnts to ilic i<;()vcnimcnt. — Under the act chartered l)aid!.'} the schedule was modi- tied somewhat. {)ro\ iding foi' a moi'e detailed statement of a hank's affairs. A well-known ' .k manager has expres.sed the o])inion that these returns "are not \vorth the paper they ai'c written oit": the reason hcing tliat fi'audulent i-eturns from !)anks that ha\e gone into li(luidation have heen included in the general statement. AN'hile it is true that statements hy such defunct insti- tutions as the Ontario Hank, the Sovereign Hank, and the Farmers' Hank have heen necessarily included, and have thus vitiated the results I'oi- the ])uri)oses of com- parison, it yet remains true that, on the whole, the state- ments have heen honestly made. At any rate, they furnish the only figures, concerning the condition oi' the banks, available to the ])uhlic. It is not neces.sary to make a detailed analysis of th'' resources and liabilities of the chartered banks; but the chief items which bear upon the standing of the banks may be briefly set fV.rth. In order to make clearer the growth of the banking ])ower of Canada, a comi)arisoii 1907 — a memorable year in Canada as well as in the United States— and their jjosition in recent years. rili: BANKS AM) Tin: (iOVKRN.MF.N'l' M)l I'ii'st. tlif extent of the loans and deposits and their n lation to one another may l)e eonsidered. ""Current Iduns in Canachi"" rei)re.sent the money loaned within theeounlry for eommereial pin'poses, and do not inehide the i-all loans whieli are hased on stoeks and lionds. 'I'iie il( posits inelude tin dejjosits in Canada (- y. and eon- sist of those payahle on demand as well as those pay- ;i!ile al'ter a fixed date. The sum total of these i'et".rns at certain speeitied times was as follows: C'lirniit l.o.iiis l)t posits May .'31. liH.I $8!)H,II."i(lcir(l current loans mIji-ojuI. These latter are distrihuted through the I .lited States. Mexico. C'uha, the ^Vest ludies and elsewhere. On the liahilities side must he considered the deposits received hy Caiiadian hanks ahroad. These several accounts ahroad conipaic as fol- lows : M,iv, 191 ."^ D.ccmkT, lpl'2 .hiiH". 1<)1'2 . . . . .lunc, iy07 C1II Loans .$96.1 -.1, '20!) 10,5,0.52.101 l'i0.5()9.812 55/298,873 Currrnl Loans $3 7. 6<) 1.7 8(5 i0.n90,!'2() .'U.'251,()58 '2;5,;i88,,'2.59 Deposits ?:97.9;i,"),'21(i 87,050.132 82.0()7.093 59.17<).'iO(j It will be seen from this statement that the funds for current loans abroad are jirovided from deposits re- ceived abroad. On ^Fay .31, lOl.'J, dei)osits received by Canadian banks abroad exceeded by .^C.O.OOO.OOO the cur- rent loans ahroad. As the foreign call loans aggregated over $9(),()00.0()0. it is manifest that some !^;j().()()().()()() of the amount loaned abroad on call is Canadian funds. But. as has been explained, these call loans form ii secondary line of reserves for Canadian banks. A fourth item in the list of assets, which may be quickly realized upon, is the holdings of railway and other bonds and stocks. In so far as these are held abroad, they may rightly be considered a cpiic-k asset, although when held in Canada their right to he consid- ered as such may be open to ({uestion. The holdings of Canadian municipal .securities can hai dly be regarded as quick assets, under certain conditions, as in 1913. Coming to current liabilities of the banks, it is fournl that they consist of three items; namely, circulation, de- nosiiS and hal'incos du.f- povcrnmcnts. The latter are divided into accounts due to the federal and provincial governments, respectively. Deposits consist of those 494 MONKV AM) BANKIMJ payable on dcnuin;! -L'posits j).'iyal)le after notice on a fixed (lay, and deposits received elsewhere than in Can- ada. These various items for the dates considered were as follows (000 omitted) : Drposits May. 'l.'i I)(t.,'I,> June, '12 Jtinr, •(): Oil (irniaiid .. . . !f.S() k 1 ,-.!) $.(7!). 777 .*:i7;!..')00 $170,012 <'" '|'»ti''' ();i().7:.,-, ():i-j.(in ().'!1..{17 4.0,H7 '^'"■"■hI J)7.!).i.") S7.n.-,n S'2.0(i7 59,171} '•'"'■'J .$1,01)2,81!) .$I,0yf),t()8 *1,08().88 ). ,t6l8,(i.-f.-, Amonpr the assets of the Canadian haidvs is carried an item made up of "notes of and checks on other hanks." which is merely an inter-hank item On tnis account it may he deducted from the current liahilities of the i)ard.'),2!>8 Railway bonds vV stoiks (17.021 ()8,8K» ()2,2!)2 H.-SSI '■'"••'• if!.'i27..''S7 •*.{20. n 7 .t;?()2,H2 !■ ^'I 7.'f,;io \. Ciirrnif f.iiihllitirs: May. ||l|.l D.r., |<)|J .luiif. I!H2 .Iiitic, 'o7 < iri'iil-itiori •■T'n)2.!l|)7 .*ll(i,(US .-^^102.011 .*7:i.:i 1 1) '*'l"'^i'^ I.O!)2.8,-)0 1.0!)l .i'l,aH5..5;)7 $I.2I!).IJ,S ■*l.22(i.l8.i •+7.if).787 Less iiolcs of and rlirrll.l(;s.^.■^o $710,271 itilin ( [irr (imI ) . 27.8 27. !• ;<1.0 2 1 . ."J Tin: HANKS AM) THK r.OVKHNMFAT v.)r, h ill 'riifsc statements cover the eliief returns of the hanks. ,111(1 showtliat tliev have steadily improved their |)osition ii! reeent years, although their husiness has greatly ex- ])anded. :U6. Government jiostal and i^nrina^fi hnnJxS.-- The un\ ernment comes into direct e()mi)etition with the char- ti red hanks through the ])ostal and government savings anks. The jiostal hanks were estal)lished in 18(')7, al- oiigh they did not hegin oj)crati()ns until i\])ril, ISfJH. There is also a system of savings hanks under the eon- tiol of the minister of finance. Prior to C'oid'ederation, ■A svstem of savings hanks was in existence in the mari- time provinces, under the control of the ])rovincial gov- ( itiments. These hanks wei-e taken o\er hy the Domin- ion in 1H()7; hut the system is gradually heing ahsorhed hy the postal savings haid. In (ireat Britain the average deposit in the postal sav- ings hanks is $7.^, and in Helgium ahout $<>.!. It was originally provided that the deposits should he in\csted in Dominion securities, hut in 1H7.") this law was I (pealed. The deposits are now handed over to the i( ceix er-geiieral to he used hy him on currctit account. W'ifhdrawiils are paid hy him. 'I'his creates a floating iiidchtedness of ahout $.")7.000.000. payahle on demand. I-'or more than twtnlv yeais the rate of interest was I p<, I cent, hut it was reduced in IHHO to .'J' '._> per cent, '^^iM in i oW I TO ii p* ' i"i"iit. '»»ii("ii' ii ri»''."» SitifWi^. i TiiJ I hart ml hanks ha\f had to fnllow dose'y the late pai.'{ Interest at .'{ per cent on ^old riservc of >i<5,7(i(),()()0 172,800 Interest at >\ j)er cent on bank balance of $500,000 1,3.000 Tocal $l.t)HH,10.'J Under the ren;nlations, deposits bear interest from the first day of the tnonlli sncceediiig that in wliieh the de- posit is made, and interest is charged on withdrawals from the first day of the month on which the w ithdrawal is made. The gain in interest which is thns made (S.'jc,- .'!!>S) offsets the charges for rent, fnel and liglit. A more detailed statement of the cost of management and interest paid follows: (lo-icniincnt fidxiiiffs Ixnik. Ax crage balance dm ing !!ni-r„' *U.000.000 Salaries, etc S'iO.OOO Interest paid 421; ,800 Total *t.V-'.H00 a.U^o (,— \ 11 .;: 4f)S MONKY AM) HANKINCi Post -office .sa'citi^.s hanks. Avera«re balance dvivm^ 1911-12 $43,200,000 Interest i)ai(l $1,257,503 Estimated cost of nianagenient (salai'ies. eonmiissions. print- ing, etc. ) 90,000 Total $1,347,503 3.12^'r i ■ It Mill l)e seen from this statement that the govern- ment pays virtually 3l [, per cent for the use of these (lei)osits. when interest and cost of administration are included. On the other hand, the Dominion can borrow in the London market at about 4 i)er cent. It will be si'cn. therefore, that little gain accrues U Mie Domin- ion througli these banks. On the other liand, they have not greatly stimulated savings; for the deposits have remained almost stationary during recent years. When it is recalled that the chartered banks have branches in almost every town and village in Canada it can be seen that the need for |)ostal savings banks is not very acute. They draw money away fiom the commercial banks of the country, that might otherwise Ik- ctnj)loyed in the business of the nation. i\^ long as the chartered banks ai-c willing to receive deposits of $1 and u])v.ards, and aie willing to furnish banking faciliti(^ to every section of the country, it cannot be said that there is any great need for government banks. Perhaps the oidy justifi- < at inn of postal savings b;mks is that they regulate more or less ttic interest rate i>aid on dej)osits by t!ie rhartercii banks. 547. dit'fipcr niiricnitiiral credit. — Heci-ntly a stn.ng fi(>man(i has t)eeri made, especiaHy m xhv \\ Csi. ior cheaper credit facilities for tl farmers. It is hoped th'' THE BANKS AND Till: GOVKllNMKNT tno ■: ' H : oovernment will eiu'()uraoo(ls. 21. Describe tlie entrepreneur system of production. 22. What is cajjitaH From what source does it de- rive its ecoiiiomio importance? 23. Define "capitalization." How is it possible to know when a corporation is over-capitah/.ed? 24. From whom comes the demand for capital goods and for what purpose? How may the entrepreneur ac- quire purchasing power? 25. On what human xuouncs dues the atvumuiatioii i>i capital depend? ••i • 1' JOG MONKV AND HANKING '2(». Name four methods l)y wliidi the saver of tlie income may invest. 27. Show liow a f^ooj currency system increases the incomes of all producers. CHAPTER III 28. Explain how value is a register of economic forces. Explain the meariing of the phrase, "prolit is the mainspring of industry." 29. (iive a definition of the word "value." What is meant })y the expression "common measure <>t' value":' 30. (iive the legal definition of the dollar. 31. What is the sole utility of money? Why is it loanable? 32. What object'ons are there to gold as a standard of value? C3. Show why the cost of production theory of value is unsatisfactor}'. 34. State lirielly the utility theory of value. 35. Define "marginal utility." Show how it is illus- trated in tliC demand for automobiles. 3(5. \\'h,it is tjie "law of satiety"? Wh;it is its relation to tlie theory of marginal utility? 37. Hov mav the two theories of value be reconciled? »-t CHAPTER IV 38. Define "exchange utility." 3'.). What commodities were first used as standards of value? ■10. A\'hat three functions of iiiotu-v were dcxeloned in primitive money? 41. What was wampum? ^^'hat gave it its value? QllZ QlESTIONS 507 42. Why were beaver skins used as money by the t'aily settlers of the rnited Stalest 13. What were the cUsadvuntages of agrieultural |)r()(hicts as money? 44. Wliat Uiws were passed in A'irginia to maintain l!ir vahje of tobacco? Did they succeed? Compare the (Instruction of growing tobacco phuits in early Virgmui i.) the same acts committed by the "night riders" in Kentuekv in 1900. To what modern form of currency in the Ignited States may the "tobacco notes" be com- pared ? 45. Name the ([ualities which must be possessed by a good currency. 40. Why is the (juality of divisibility lecessary? 47. Whv were beaver skins unsuitable for use as monev on account of their lack of uniformity? 48.' Why slioukl a substance used as money possess the quality of cogni/ability ? 49. Wliy have civili/ed countries generally adopted ,' 508 MOXKY AND BANKING 50. Xame three requirenients of good coinage. Wliut nu)tives led to the debasement of the coinage? AVho was injured by the debasement of the coinage? 57. Wliat is the essential (juality of the standard of value? 58. Why ■would silver disappear from circulation if the demand for its use in manufactures increased;" 59. What is dresham's I^awf GO. How did the earlier legislators atiemi)t to deal with the eifects of (iresham's Law!' What result? fil. Give a brief sketch of Kngland's experiena' with the double standard. G2. How did England come to adoj)t the single gold standard? (>.'}. What effect has minting upon the value of metals? 04. Define "legal tender." 05. What were y* 'exander Hamilton's ])roi)o. ^.s respecting coinage in the Tnited States in 17i>l !" OC). Why was the ratio of 15:1 unsatisfactory? (57. ^^'hy was there no gold coined in the I'nited .States before IH.*}!? «">H. \\ jiy did Hie newly-coined silver dollars disaj)])ear fit)m circuiation? i't\K What chimge did Congress make in the ratio in IH.'U? What was Lhe ( llVct ? 70. What change occurred in the standard in IHO.'Ji' 71. How was the single gold standard adopted in the rnifcd States? 7'_'. !"'or wb;il did the Act '.f 1 the niie^ra' lion of industry on the circulation of money? • M i! h. m :,io MONKV AM) llANKlNr. f^A 80. ShoH- how foreign trade may result in a special demand i'or gold. 90. Sliow hou- eontractr, sometimes affect the demand for money. 91. Does the nse of money as a store of value affect the demand? 92. What effect upon the 1 iU loiiij^Ii ■ »v:..:..,_ ,: -.: ■ an working cupi tal to their customers C-\II :i:i .Hi MONEY AM) 15A\KING ,f: ■ :- I ' : 1^ 1.52. W'liy are bankers williiig^ to purchase drafts oi exporters^ l.).'J. \Miy are New York banks always willing to pur- chase foreign drafts? \.')4: Define stei'ling excliange. I.'}'). II' the I'Jighsh jjouud sterling contains 113 grj'.iiis, how is it possible to determine its vahie in I'nitcd States money? !.)(). I low is the cost of shipping gold across the Athuitic calculated? l.)7. What is the minimum price of demand sterling exchange? l.")H. Why is it impossible under normal conditions for sterling exchange to sell higher than ''*^ t. 88(5.5 ? 1.59. P'.xplain the conditions whieh made it possible for the price of demand sterling to fall to ^i.S'.i in :Mareli. T.>()7. 1()(). Describe the Knglish gold bullion market. Kil. How was il possible for llie Hank of l''rance to maintain a '.i percent, discount rate in l'.»0(>, while funds could ])e loaned in London at <» per cent.? 1 ('.'_*. A\'b;it is the significance of shijjments of gold to foi'cign countries? 1 (!.'}. Mention certain j)eculiarilies of our foreign romnieree. Kit. What are the "itnisible" items of foreign trade? ir»,5. Show how capital mo\es from one country to another. ICiCi. Show tliat interest and dividend payments to foreigners aU'eet tin SD-ealled foreign trnde balance. Hw. What elfeet u|)on tbe demand for foreign ex- change is exerted by the iV.et that American merebiiiidic IS carried in foreign sliips? QW/. (^IKS'llONS .51.> 1(>8. IIow do American tourists in Europe affect tlie (Kniaiul lor i'orci«,ni exchange? 1 (>•.». What ])oints are worth mentioning in a daily newspaper article on forei^ni exchange? 170. Kxj)lain the "London Settlement." 171. What is meant by "cables"? By speculation in tnrcign exchange? By "covering movement"? By iiiaiiipidation? 172. Explain tlie several varieties -^f exchange. How are their values determined? 17:}. What is demand sterling and Mhy do diftVrent (Itniand bills sell at dilFerent prices? At what rate of iiiteiest are long bills discounted? 17k \Vhat is the business of London bill brokers? 17.'). What is the eff'ect on tiie i)rice of exchange of an issue of GO-day finance bills? The effect (>0 days later? 17(5. Upon what does profit on finance bills depend? Slio'v that their issue is cfiuivaknt to borrowing money aliroad. What efl'ect does their isstie have upon rates of interest? What advantage does London possess over other financial centers? 177. What are the advantages to a bank from hav g a foreign dei)artment? 178. Why is a man who wishes to travel abroad likely !o transfir his deposit account to a bank which can sell iiiin a letter of credit? Sui)pose you have a letter of credit issued on a dejKisit account. If you asked for ' 10 at the Deutsche Bank in lierlin on a day when Mcriing was (pioted at M. '20.4.3, how jiiueli would you nali/.c in marks? For how much would your deposit K count be del)ited when the draft reached home, if ster- iiig exchange \\.is selling ai MM() 170. What are the advantages of using a comme rcial % m I! m h^ 516 MONFA AM) HANKING letter of credit? \\'hy are banks all over the world ea.5. What i)n)lit can be made by l)uying sterling to cover if he sold the draft on \'ijnna for $.'2030 per Kronen f 182. Would there ])e any ])rolit in an arbitrage trans- action at the following ([notations? Sterling in New York $4.88.3 Francs in London 2.). 10 Francs in New York .3.10 "s less 1-.32 Show the ])rotit on $1,000 invested in the arbitrage transaction. CHAPTER X 183. What is the world's stock of gold and silver? ISt. IIow much silver is it estinn-itcd that the world has ]>!oducedf Why did mining decline after the fall of the Roman Empire? 18.3. IIow were wars financed dining the Feudal 180. What was the effect produced by the new stock of silver from America^ • QUIZ QUKSTIONr jl / 1S7. Show the effect of American silver upcMi eeo- iioinic eoiuhtions in Europe. 188. What is binietalHsni? 18!). What are some of the difficulties of maintrinlng a bimetallic standard? Why did the difficulties arise i ,,iilv in the nineteenth century? 1«U). Wliat are the advantages of bimetallism? 1<>1. What is meant by the single standard? What i the place occupied, under the single stanilard, by sub- sidiary coins? VJ'2. Give an account of the early attempts at inflation. VXi. What was the reason for the formation of the Latin Union? 19-t. What were the effects of the demonetization of silver by the Tnited States? lit.'). Explain the significance of the acts of 1878 and 187. What were the reasons for the final failure of bimetallism? 1?1 I" CTT.APTER XT 108. ^Vhat was the economic condition of Canada after the Contiuest? 101). Who controlled the wholesale trade of Canada after the Conquest ? IIow di.l tlu y aflVet the monetary svstem? L»00. Describe the monetary system of tlu' c-ouiitry. • .«l. Give an account of early experiments in media i ( xchange. o\S MONEY AND 1} AX KING *i 202. "Why Mas Halifax (.•unriicy aclopled as tlic staiulardf (jii\e an account of the \aiioiis vdiiis in cir- culation and tiicir ratinijs. 20.'J. Describe the changes in Canadian iiiou'v after the American Revolution. 204. AVhen was the York siiilling depriveii of k-ual recognition? Why? 205. AN'ith wliat did the act nf 1808 dealf 20(5. De^'-rihe the dual function of the early nu •- chants. 207. Outline the early exchange business carried on between Montreal, Xew York, and London. 208. Describe the paper money issues during tiie war of 1812-1 8U. 209. AVhat M'as tlie etl'ect of the army bills on Ca- nadian business? 210. What were the causes which led to the foundii _r of the ]Jank of ^lontreal ? 211. ^^'hose ])rinciples Mere ad()])ted In founding the first Baid^ of Montreal^ ^^'hat other cities established ba. , shortly after:" 212. Describe the chief features of its articles of association. A\'liat Mere the ditfercjices in the attitude of the i)e()i)le of Tpper and Lower Canada to bank notes? AVhat Mere the results of this attitude? 21.'}. \A'liat is the liistory of the first l)anks in Ipper Canada? AVhat Mas the effect on the other Canadian baid 521 •JtS. ^Vhy is credit ;i siii»jt('t mil uuitliy of iiivcsti- CllAPTKH XIII 249. What is the tieral etlVet of the use of eredit on J t rices f •J.);). Descnl)e the various eti'ects oi the (hllVreut kiiids of cre(nt on iM-icesf •J.Jl. Show how tiansactlons may l>e setth'd without the use of niotiey at aiL •J.")2. Show how a lessened (kniand for money causes a rise iii prices. 2.5.'}. \Vliat effect does an issue of national hank notes liave upon piices^ 2."j4. Explain the ditt'erence in circulation of I'uiik notes and checks, •2.">.>. Has government cre(ht money a greater or hss (fleet on prices than hank notes ^ 2.j(). What is the relati(,n l)etween cre(ht and specu- lation^ Dilferentiate hetween legitimate and illeniti- inate specuhition. 2.57. How may specuhition l)e hoth the cause and effect of a rise of prices!" 2.*)S. Descrihe tlie conditions which cause a contrac- tion of credit. CIIAPTKH XIV 2.59. Name the varieties of government cre(ht cur- rency. 2t;0. What is the essential element in liat money? 2G1. What are the factors determining- the value of credit money ^ 202. What is tlie danger in the use of credit mone> ? Hh ^•3 11 i I I'll MOM^V AND BANKINC 1 1 *■ What devices are used to inaiiilaiii tlic value ol' ercdit iiioiay' '2('}li. W ail issue of eredit nioiicy is (.xeessive, v will l)f the eU'eet on its value f •JCi. Does iiiakiiiH' ereiiit money le^al tender prevt its depi'eeialionf •J«i.). Why is H(,vernnient credit ij^oney not ideal money ( •_'<;<;. What are some of the dit^ieulties of adjusting tlu- supply of oovernn.ent ertnit money f lm;7. What was the feelino of the people re.yardin^ od\crnment issues hefove IKClf ■jr.H. Why are o(,\ crnnK-it honds not credit money? What prohiem was I'aised !)y the tinancinj^ of th«- Civil XS'arr •_>•;<). What are some of tlie di' advantages of ro. How (Iocs the l)aiik act as a^xiit hrtwicii the capitalist and ciitrepreiicur ^ Kxphiin how the hank is a (hstrihiiter of c'a])ital. •J«(). Wluit haiikiii<>- priMcii)le is it the viohition of which causes a hirj^e proportion of Isank faihu'esf Name Ihiee reasons wliy hanks shonhl not h)an funds to l»e (diixeitcd into fixed eai)ital. •J81. Trace the ev(.hition of the two main functions (if hanking. Contrast the IJank of An»stcr(hini Avitii ilie Hank of Kni-land. 282. What are some of the peculiar privileges of liankers' 2Ha. l)isi)r()vc the statement that "l)aiiks create ca])i- 284'. From what souros doe : a hank ohiain its cai)ital and credits 28."). What are the three essential hankinu' oj)erations^ 280. How is the i»anker the '"arhiter of in\ estmenf f ( HAPTKH XVI 287. Does a hatik lend credit or money? Show that rredit as a medium of exchanue is supirior to mon* \ . 288. Show how credit promotes the pioduiiion ol .'I II >ds. 28<». How d(t hanks create credits' 2'.M). \N'h\ is l)ank en dil prefi'rahle to cash' 2!M. Show how hank credit passes from hand to hand ' ithout l»einu litpiidated. 2'.>2. Show the similarity helween elircks and tiaiik notes. 2'.>M. On wlial does the larnlnu' power of a Itank dc- ill !24 MOXF.Y AND iSAXKIXf 1 ^ AS.-: i I m fr |)cn(l:' Docs llic National liaiik Ac'i limit \]\v ainoiiiit of loans a hank may makcf •J'.»k Docs it maki' any diirci-ciicc to a bank wlictlu i it loans ca>li or credit:" Illustrate the point hy an ex- ample. •J!>.). Why is the control of i;i-cat stores of casji so ^rcat a prize in Wall Street.' A national hank in Kalama/oo. Michi/^an, i-ecei\is ;i cash deposit ol' SI. 000 which is left foi- one year intact, no checks hcin<.i' di'aw ii a<^-ainst it. The hank has no dillicnlty in loaning- to lt^ own customers at ') i)er cent. These customers make all their |)ayments hy check and de|)osit all their receipts in the hank. Calculate tlu' yross profit \\\\\vh the hank can make on tiie -"^LOOO deposit. lea\in reserve:* •JOO. What Is a seoiidary reserve? Ts there an\ danger in this |)olicy ' .'{00. Do honds constitute a reliahle ri ser\(' .'{01. (.'an the .Secretary of the Ti-easury aece|)t ofliri than ( Jovernnient honds as security for deposits of (io\- ernuii nt funds' CTTArTKlt XVII 'M)'2. How does a hank statement difT'er from n mer- cantile form ^ •Mli. How d.K s the staliriient N hal ,s meant hy the -hook-valne- of har.k str.cks.' '{2i;. ^^ hat disposition is nltimateh- made ol lu' item '■midi\id((| |)rotits""r .'{27. What inducement is there for the hanks to take out cMcuIation ! .•{2S. Kxplain (he item "State Hank \ntes Outstand- .•{2'.». I-Xplain the item -mdix idual depnsils.- What is a ct itificate i?f d( posil ' , •'•^" ''"•*'■'• ^^''■^' .-iHlitinns do.s the <.-over.,m. What is a ■•cashi, i\ eJKck"'' QUIZ l^rilSTloN: 5Z1 ClIAPTKH XIX .'J30. What five institutions art- calkd •hanks'"? .'J.'JT. What is Ihc (hircrciicc htturen national and staU' hanks? iV.iH. What is the jji-incipal husiness of hirjjc i)rivatc lianks? .•{.'{^». Descrihf "niukrwritin^f."' (). What is thf (hff'ciriuT hrlwttii the trn>>t com- pany anil a hank? How did the trust company get its name? ."Ul. Afc trust comi)anies r((iiiired to kee|) reser\es? :iV2. What is the nature of the dejjosits in trust com- panies ? lii'.i. What departments are re(|uired in a trust com- jiany ? .'U4-. What are the functions of a trust company as individual trustee? .'U.). I)es( rihc the coii)orate trusts of a trust company. '.iU\. Whv is a sa\in<4s liank really not a hank at all? .'{ tT Dcscrihe the oigani/at ion of a hank. 'MH. Desciihe the exolution ol' a l)ank in a small town. .*U'.>. Whei-e is ultimate authctrity loeated in an iii- ciuporat ." hank ? ;{.")(). \Vhat are the re(|uircments for directors named in the .National Hank .\ct ' What is tin penalty on directors if they allow the law to he violated f ;{.")l. What considi : tions govern the choice of di- iT'ctors? ;{.VJ. .Vccording to the courN. what Is the responsi- hility H. \\'hat are tiie duties of the paying teller? Dis- count ch-rk? li.y.). What are the duties of the receiving teller? I'lom what foui' sources do funds come into a hank? :j«)0. What are the (hities of the note teller? .'J(»l. l)esci'il)e the work of the discount clerk and show wjiy he is husy (hu'ing a j)eriod of acti\-e speculation. .'}()2. Mention the important hooks kept hy a hank. M7. Distinguish hetween general and special de- posits. :U)H. How did the Legal 'I'ender Acts work a hard- shi]» to the dcjxisitors during the War' How far is a liank rcsponsihle ff>r s])ecial .Itposits? QUIZ (iUESTlONS i^2«J .*{(»!). What advjuita^xs do the salcty deposit vaults hriii^' to ;i hank:" ;}70. What arc the inducements offered to depositors liy tlie hanks' ,'{71. Dcscrihe the iHHicullies in tlie way of cstal)lish- iiio- a new hank. .'}7'J. Why are (lei)ositors h)yal to ohl and conserva- ti\e hanks;' :i7'.i. When do (lei)ositors practice the "kiting" of ilucksf ;J74. Ilhistrate the method of "kiting." .•}7.'). Siiov.- how the title to deposit checks often l)e- (I lines an important {juestion. 87(5. Give an illustration of a case of disi)uted owner- ^llip. :}77. \Vhat is the law regarding the acceptance of deposits hy insolvent hanks ^ ;J78. What risk does a holder run l)y retaining a check too long!' .•J79. \Vhat is meant hy "reasonahle time" in the case (if a local hank' .'{HO. What recourse has the holder if a l)ank refuses to j)ay a check? .*{81. Can a depositor stoj) payment on a chc k? What elfcct has the death of a depositor upon checks not yet paid!' :iH2. Can a hank pay a check if funds to th.e credit of till' depositor aic insullicient f .'iS.'}. What is a hank's liahility in the case of a forged .heck : ;{S4. May a hank pay a post-dated check hefore it is (h.e? ;{H.j. \Vhat is the cfrc( i of tlie fact that the relation 5;;o MnM;^ AM) I'.ANKIX, hi'twt'cii tlic liiiiik iiiul till' (lipositor is thai of (lcl)t(ir and creditor.'' What is meant hy ■"set-off'"^ 'Mi'}. 1 f a hank holds a depositoi-'s unsecured note and the depositor fails, what ri^ht has the hank to his deposit ' '{87. If a hank fails may a dej)ositor pay his note to the l)ank hy a cheek on his dejxisit f ."{SH. Show that till' "set-of!"' may make failures ap- |>ear worse than they ixally are. .*W.>. Illusti'ate the fore^oin^- hy a concrete case. .'}'.»(). Sjiow liow i)anks sometimes protect ti.emsclvcs against loss throu/i'h a horrower's insolvency. CHAPTER XXI .'101. What two qualities arc essential to the making of tl,.' banker? •'{'.>2. W'liat is meant hy inxcstnit iit loans ^ .'ii'.'J. Fnder what conditions are inxcstnicnt loans gond haid k What are " • lustria! loans ^ Show jiow they are secu'-ed. What are rediscounts!' .'}!),}. Wjiat is meant hy "Capital" loans? *}0(). Should a hank loan a concern money t'or the consti-n.tioii of a plant ? .'{f>7. ^\'hat Ciii-porations lend mf»ney on mortgages!' .'{!)S. How are the loans classified in the reports to the ('(iinptroller:' .'}{)!). What changes liave taken ])la«'e in ten years in the ])roj)ortion of the demand loans!' M)0. \^'llat docs "douhlf name ])ai)er" represent!' Is this paper mucli used in largi' cities? (^riz (^riisiioNs 331 lor 11(1 Ills to ip- 'C'S 4-01. Distiii^iiish hctwccii ■tradt"" and "hrokcrs" " paper. K)2. What provisions distin^^iiish the /pid^Muiit note' K).'{. Name the |)i()\ isions of the eolhiteral note In \Jiieh 'he hank pi'oteets itself against h)ss. K)l. \/hat risk is in\<)l\ed in eolhiteral loans f J-O.j. lv\[)lain what is meant hy le^al rate of interest. K)»i. IIow are call loan rates of o\ei' 100 per eent consistent with the usury lawsC 1-07. Why do eonsei'x ati\ e hankers ohjeet to loaning' nil hook aeeounts ' WH. What is the task of the linaneial manager of an enterprise f "M IIS I'e iC to in CIIAPTKK XXII K)!). What classes of property may serve as collateral for loans' 110. What are some ol' the dillieiilties of using mer- ( liaiulise as collateral 1 HI. What art' the advantages of good warehousing lausr H"jf. Show that loans on merchandise are a legiti- iiiate functix- cliange Hank of New ^'o|■k!' HI-. Why is merchandise hetter collateral now than tormcrly ' H.'). lIow docs (he new uniform law safi'guard ware- house ri'ceipts ^ i]>'>. What are the risks Iinolved in loaning on ware- house receipts f f n I i :l '^ 53ii M()M;\ AM) liANKlMl 417. What JUT tlif rc'sp()ii^il)ilili(.^ of a warclioiiscniaii under the i)reseiit hiw ' 418. I low is the issue of i-eeeipt^ sate. What protection is aironied to holders ol' re- ceipts.' 420. Is garnishment alh)\ved' 4-Jl. What is the [)enalty for the illegal issue oi receipts' 42'J. Wliat do some hanks suhstitute for warehouse recei{)tsf CHAPTKU XXII I 111 i'2',i. Wlien (hd ere(ht departments appear in l)anksr 424. Name the soiu-ees of crecht information. 42.3. How far are the credit a,i;'encies to l)e depended upon:' 42(i. What are the (hities of the cre(ht man: 427. What is the husiness of the conunerciai note broker:' 42H. What ehann-e^ have taken phiee in the conuner- ciai pa|)er business i-ecently' 42i). Tpon what do the demand and supply of com- mei-eial paper depend ' 4.'J(). .Show how a country possesses areas of hi^^h and low interest I'ates. t..*il. What four inducements may a dealer in com- mei'cial j)api'r otrer to a borrower' i:i2. What is the best guaranty against loss furnislK1'1<»N> 5'M C IIAPTKK XXIV ilU. What were the characttri sties of early hanking- 111 the Tiiittd States^ i;{.}. W'liat was tlie rehltioii of e;irl> \ni\\ks with the u(i\ enmient ' t;j(). l)i\ i' hanks to loan on hank stoek ( V.i\). What were some of the featnres of the First Hank of the United States^ 410. Was the Hank sneeessful? How mneh (hd it I'lid to the •government:' 4tl. On wiiat uronnds was the First Hank of tlie United States ohjeeted to ^ H'2. Wliy was the Seei)nd Bank of the United States ()i',>. What conditions led to the Xational Hank Act? 4.")(>. What etrect did the Act ha\e on the market for Fm'ted States bonds:' 4.')7. (iive the early history of the Act. 4.)H. What are the duties of the C'ompt rollei" ol' tl le ui'icncN 4.V.>. Xame the chief provisions of the Act. !■<;(). Describe the issue and redem|)tion of National l)ank notes. 4(11. WJiat are the r tional bankinu s\ stem ' eser\c i-ecjuiicmc nts of the na- 4(;-.>. X CirAPTKlJ XXVI inie sonic of the di trerenccs belwci, ;i bank note and a drpusit ciniinc\. Ki-}. What are the liniitatiMis of the d( pc.sit renc\? cur Ij: I I,' I. ire^rnt sysl eii! iniensMics stringencies ;ind panics at ceil; on scnson.s. QUIZ (^l l^TloXS 5;}^ K;.). Show tliat tlie (luii<4er of depleted reserves is acute ill times oi' j)aiiie. iCAi. How may an emer<^eiiev circulation lie issued under the Aldrich-\'reelaiid Act:* k;?. \\'h\- is the cii'culatioii ol' t)ank notes inelastic^ WtH. I'nde!' what circumstances docs the hank-note CI III •culation increase ,). What are the disadvantages of the lack of unity k; oin' svstem l-TO. What i^ the importance of savinXi:V AND HA.NKIXcj •J-H.'}. What additional j)nvilcnc,s .sli„„I,l be -iven t<. national hanks ' ■1H4. Why is it ,)n.,Hr to forhid tinaiicial l)anks aetin-r as reserve agents.'' * CIIAPTKU XXVIII ■48.5. In what way is the Secretary of the Treasury compelled to assume ,no,e responsihihtv than helonu's tohisofheer " 48(1. How does the I'nited States Treasury intensifv monetary strinoencies:' 187. Are these eon(.,(ions the result of our currency or ot the Treasury laws!' _48H. \Vhat expedients have heen used l,v Secretaries of the Treasury to miti<^ate stringencies^ It?- C'irAl'TFJJ XXIX 48!). Tnder what circumstances was the Bai'k of Kn-land founded r I)(serihe the husiness of the orio- mal liank of Knoland. ^ 41M). What c.nditions caused the development of the use oC cheeks:' 4!>I. What were thi' provisions of the Hank Act of 1814^ ^ M)-J. Wh;it is the present character of the Hank of Kn^land note:' ion. What is the rclati<.n of the Hank of Kn. State the genei'al eonditions under wliieji a bank iiiav be ineoi'porated in Canada. .)()7. Describe the essential I'talures of the branch liank system. ,')0H. Kxjjlain carefully the eonditions of note issue in Canada. What pro\ isi(tn has bcm made foi' the issue ill' circulation during- the annual ei()p-m.)\ in.u jx lind^ .')()!). In what respects are Canadiaji l>ank tuitcs an asset currency !' .510. What is meant l)y "tlu' central gold res<'rves'V How far will they aid the lianks in meetuig an emer- ycncv? .11; 538 MONEY AM) P.AXKING oil. What are the methods a(l()])ted in Canada to insiire the (juality of hank notes ^ .■)12. What are the re(inirenients of the Hank Act uitlt i-e^ai'd to reserves;' Is it safe or desiral)h' to per- mit the hanks to determine the amonnt of the i-eserves they will hohl? ')Mi. (iivo an estimate of the vahie of eaeh element in a ("anachan liank's ix'serves. .51 k Disenss the ,justitication of the practice of the hanks in makin<4' <"ill loans in \cw \'ork. .)1.>. Of wliat \alue aie hioh-elass stocks and honds as a means of maintaininu- tlu' resei-ves of a hank? .")1(;. What relation do the hanks hear to tlie whole- sale and mannfactni-ino' husiness of the Dominion:' AMiat is the new provision of the act with respect to loans to farmers!' .517. How are Canadian hanks inspected? What were the new provisions with regard to inspection added in 191.'i? .518. (Jive an acconnt of hank failnres in Canada since Confederation. .51'.). What value may he attaejied to the shareholders' audit' .5-_'(). What is the Canadian Hankers' Associa- tion ' CIIArTKJ{ XXXI .521. AVhat are the main criticisms made of the hranch hanks in Canada' What arr the ditHcnlties in the way of estahlishing local hanks? ■:.).> |.' ... . . I.. :.. il. ... f! I ! i 1. I • ! ■! J 11 ! ■-■ ;..". j .";,;;: ; ;;;;■ ;;;;;;;;;;;'. r;"\ 'iiiii;;; TiK i>t'aTi("ii iuiJiKS can eoncentrale their le^al tender money reserves at lhre;ilened Jioinis. Qiiz ()rr.s'ri<>xs r>o .")■_'.'}. To what f.xtrnt do the hanks furnish hankini*' facilities to the popuhitioii as a w hoU' f W'ouhl K)eal liaiiks meet tlie situation Ix'tter:' VJi. To wliat extent are (h'))osits used as eurrenev:' \\ hy have the le^'islators in Canada paid more atten- iaiii to iiott' issues :" Is a ehiTkiuy aeeouiit as expeiisi\e [n ;i hank as the issuinu' of its notes:' .VJ,'). Discuss the justitieation of <4ivin<>" the riiji'ht of imte issue to the hanks. ,Vi(). i\re the protits on C'anachan hank notes exces- sive^ .V27. Is tlie sui'])lus fund e\cessi\e? If so. in what w.iv should it he reduced;' .VJK. ^\re tlie haid^ .Vi;>. iVre the recent nier.'?(). .Vre in.terest cha.rues \\\ the W'cvt e\<'<'ssivc? .').'{7. Is there I'oom in Canada for hraiich hanks with iiall caj)ital ' !! r>\{) M()\]'\ WD i'.ANKIXC, ."538. Do the Canadian Itaiiks pay a f'aii- rate of inter- est on {lej)()sits:' y.ii). What arc tht special problems t'acin<4' the hanks during the croi)-inovin<>' ])eriod'' 5i0. IIow do the hanks finance the fanners and deal- ers during the niovin*^' of the ci'opsf 541. Desci'ihe the ])rocess l)y which Canadian inij)i)i't- ers settle their debts abroad. 5i'2. Describe the Canadian clearing- honse system. CIIAPTEU XXXII iiiti. Is the fj^old reser\e behind the Dominion notes too large? If so. how should it be rivhiced' .544f. Should Canadian banks be more hea\ ilv taxed' .'j^.j. What are the pi'inci|)al retui-ns made I)y the banks to the government ! I low may one determine the position of a bank by these retui'ns? ')M). Are the postal savings banks, everything consid- ered, beneficial to Canada!' 5^7- Can cooperative credit societies be expected t.) do much to reduce the rate of interest in tiie West ( APrEXDIX 1 GOLD STANDAHl) ACT OF MAIUU 1 i, 1900 LrLuuc— No. ;m).j \n \ct To drfinc niifl fix the ^taIu^lra of value, to maintain the ?■■"•'*>■ "^ ,„ ,11 fonn. of .n.m.y isMunl .,r eoined by the Lnited States, to refund the public (l.bt, and l'.>r othei- purposes. He if enacted hi/ the Senate and Ilonsc uf licprcsentathrs of the United States of America in Con^resn as.send)led, Tliut the .Inllar consist inn- of twcntv-(ive and dght-tcntlis grains of gold iiino-tcntlis fine, as cstal.lislRcl by section thirty-five hundred and eleven of the llevised Statutes of tlie United States, shall he the standard unit -d' value, and all forms of money is.ued or corned hy the United States shall be maintained at a parity of value ^^■ith this standard, and it shall be the duty of the Secretary of the 'rrea.>urv to maintain sucli parity. Si... . i2. That United States notes, and Treasury notes is- sued tnider the Act of July fourteentli, eigliteen hundred and ninety, ^vhen presented to the Treasury for redemption, shall be redeemed in -ol.l com of the standa-d fixed in the first section „f this Act, and in order to secure the ])rompt and certain re- .iemption of such notes as herein provided it shall be the tor.. and n,/unt,ain the -old coin ■n the reserve fund l.v the for. <.,,i„o- methods, and the" amount cf surh -old eoin and l)ulHaid fund shall at anv tune fall '"■l.in one hun.lre.l nullinn dollars, then it hall i)e li'is duty t„ restore the >anie to the niaxiniuiu sum of one hundred and fifty ""' ' ''""'"■^ ''.^ 'u.rrounin- money on the eredit of the Tnit/d States, and for flu. deht thus ineurivd to issue and sell o.uj.on ...• reKistend hnnds „f fhe Tnited States, in such lorn, as h. „,,,v presenhr. n. deuonunalions of fifty ,loIlars or anv multi,,le thereof. I,..arin- interest at the rate of not exceedin^r three per centum per annum, paval.l.. ,,uartrrly, sueh honds to l„. pavahle at tlic pleasure of the Cnit.,! States after one year fron, the pnrchase or redeem any bonds of the Tnitul States, or for any other lawf.d purpose th"e public interests may re.iulre, except that they shall not lie used to meet defici. iieies in the curivnt revenues. That Tnlfed States ■infes when ivd,r„„.l in aceon lance with the pr.n Islo„s „f this Metion shall be reissned, but shall be held In the r, m.-vc fund unfil exenano-.d for ^rold. as hnvln provided; and the onjd ,,„„ '""J i'ulhon in the reserve fund, together with the r.deemcl notes held for use as provided in this section, shall at no lime exceed tlic maximum s,i,n of ,„,.. hnndivd and fiftv .«,ni;=.M .1.]];... Sec. ;}. '1-hat not!,!,,,- ..mtainrd in this Act shall 1... construed to affect the legal tend, r -,„allty as „„u provide.l by law of the APrENDIX A:\ ,,i\ir dollar, or of any other money comcd or in.Micd h\ the Initod States, Si;c. 4. That there be estabhshet} in tlio TnaMiry Drpart- ! . lit. as a part of the oftice of tlie Treasurer of the I'nitcd >t ites, divisions to be designated and known as the silver dollars held a payment of such certificates on lieniand, and used foi no otiier purjiose. Such certificates shall be receivable for cus tonis, taxes, and all public dues, and when so received may !)( reissued, and when held by any national banking associatioi may be counted as a {)art of its lawful reserve: Prozidcd, Thai wheneyer and so long as the gold coin held in the reserve fuiu ill the Treasury for the redemption of United States notes aiK Treasury notes shall fall and remain below one hundred millior dollars the authority to issue certificates as herein provided shal be >u-i)ended: And provided further. That whenever and s( long as the aggregate amount of United States notes and silver certificates in the general fund of the Treasury shall .xcced sixty million dollars the Secixtary of the Treasury may, in his dis- cn tion. suspend the issue of the certificates herein provided for: J)i(l jinnidid further. That of the amount of such outstanding certificates one -fourth at least shall be in denominations of fiftv dollars or less: And provided further. That the Secretary of tile Treasury may, in his discretion, issue such certificates in denominations of ten thousand dollars, payable to order. And section fifty-one hundred and ninety-three of the Revised Statutes of the United States is hereby repealed. Si-:c. 7. That hereafter silver certificates shall be issued only of denominations of ten dollars and under, except that not ex- ceeding in the aggregate ten per centum of the total volume of said certificates, in the discretion of the Secretary of the 'J'reasury, may be issued In denominations of twenty dollars, fifty dollars, and one hundred dollars; and silver certificates of higher denomination than ten dollars, except as herein provided. shall, whenever received at the Treasury or redeemed, I)e retired and canceled, and certificates of denominations of ten dollars or less shall be substituted therefor, and after such substitution, in whole or in ])art, a like volume of United States notes of less denomination th;ui ten dollars shall from time to time be retired ;uid canceled, and notes of deiiominafinn«: of f.jn dnllnrs and upward shall be reissued in siib4ituti(ni therefor, with like qualities and restrictions as tlio^e retired and canceled. APPENDIX 545 y and hrlri 1 used for lo for cu>- .'d may I)r issoc'iatioii id 1(1, Til, it ■-erve fund notes aiiil 'ed million kided shall cr and x) and silver cced sixty n liis dis- vidod for: itstandinrj IS of fifty 'rotary of ificatcs in icr. And ! Revised sued only it not cx- rolninc of y of the V dollars, ificatcs of provided, be retired dollars or )stitution. notes of ) time he ■ n floll.ir^ with like Skc. 8. That the Secretary of the Treasury is •.:y authorized to use. at his discretion, any silver bullion :ii tiie Treasury of the United States purchased under the Act of Ju'y fourteenth, ein;liteen hundred and ninety, for coinage into such drnominations of subsidiary silver coin as mav be necessary to nut t the })ublic reciuircments for such coin : Proxahd, That the amount of subsidiary silver coin outstanding shall not at any time exceed in tl;e aggregate one hundred miliions of dollars. Whenever any silver bullion purchased under the Act of duly fourteenth eighteen hundred anil ninety, shall be used in the coinaiie of subsidiary silver c(;in. an .unouiit of Treasury notes issued under said Act equal to the cost of the bullion contained in such coin shall be canceled and not reissued. Set. 9. 'I'hat the Secretary of the Treasury is hereby author- i/,'d and directed to cause all worn and uncurrent subsidiary Mlver coin of the T'nited States now in the Treasury, and here- ifter received, to be recoined, and to reimburse the Treasurer of the United States for the difference lietween the nominal or face yalue of such coin and the amount the same will produce in new coin from any moneys in the Treasury not otherwise appropriated. Skc. 10. That section fifty-ono hundred and thirty eight of tlie Revised Statutes is liereby amended so as to read as fol- lows: "Section 51138. No association shall be organized with a less (Mj)ital than one Inmdred thousand dollars, except that banks with a capital of not less than tir'ty thousatid dollars may, with the approval of the Secretary of the Treasury, be organized in any place the population of which does not exceed six thousand inhabitants, and except that banks with a capital of not less than twenty-five thousand dollars may. with the sanction of the Secretary of the Treasury, be organiz-d in any place the population of which does not exceed thn'e thousand inhabitants. No association shall be organize.l in a city the i)o})iilati()n of ;ti. ..If.J ,,f less ill! , . , 1 <■ .'1 1 1 .1 ^llilli cXCCCuS 111.. .!..•.. two hundred thousand doUa'-s." Sec:. 11. That the Secretary of the Treasury is liercby C— VII— ;)4 546 APPENDIX h ■. I* :,--• authorized to receive at the Treasury any of the outstanding l^onds of the United States bearin^r interest at five per centur, I.cr annun., payable February first, nineteen hundred and four ■■UHl any l)„nds of tlic United States hearincr interest at fuu, ].er centum per annum, payable July first, nineteen hundred arR seven, and any bon.ls of the United States bearin^r interest al three per eentun, per annum, i.ayable August Hrst, nineteen hundred and ei^ht, and to issue in exchange therefor an e,,ual amount of coupon or registere.i bonds of the United States ,n •such form as he may prescribe, in denonnnations of fiftv .lollars or any multiple thereof, bearin- interest at the rate' of two per centum per annun., payable (p.arterly, such bon.ls to ho payable at the pleasure of the United States after thirty vears from the date of their issue, an.i sai.l bonds to be pavablr principal and interest, i„ gohj coin of the present standard 'value,' and to be exempt from the p; um.i of all taxes or (hities of the United States, as well as from taxatior in any form by or under State, inunicij)a], or local authority: Pnnidrd, That such outstanding bonds r ay ' r received in exchange at a' valuii- tion not greater tiian their present worth to yield an income oC two and one-,,uarter per centum ])er annum: and in considera- tion of the reduction of interest .tfccted, the Secretary of tlir Treasury is authorize.l t., pay to the holders of the out'standin.- honds surrendered for exchange, out of any monrv in the Tr.'asury not otherwise appropriated, a sum not greater than the .l.tf.rence between their present worth, computed as afore- said, and th. ir j.ar value, and tlie paynu .,ts to be made here- un.l. r shall be laid to be payments on account of the sinking fund create.! by section fhirty-s.x hundred ami nlnetv four of the K. vised Statutes: ./,-„/ prmhlrd f„rfh,r. That" the two per centum bonds to be issmH ,nu|e, fbc provisions of this Act sliall he issued at not l.-ss than par. an.J thev si,,!! be numbere.l consecutiv.lv i„ tl,e or.ler .,f their iss,,.. ,,,,1 „ ),,„ ,,,v„,ent is made the last numbers i.^ied shall be first paid, an,) thi, or.fer shall be follnveed uniil all the b.m.k are paid, and uhe„ever '" ■ '' ■■■■••"••-="""^^ r,.-,,,n.> ai.- (aii((i for payment interest tlureon shall cea^e thrc m.-ntli- after such call": and there Is ArrENDix 5« utstanding XT centum and four, ^>t at i'owr iiulrcd atid interest at , nineteen ' an e(jual States in 'ty dollars te of two nds to he irty years payable, ard value, ies of the in by or >d. That a valua- nconie of oiisidera- ■y of the standini^ r in the ter than ts al'on - de }i(Te sinking four of the f«() this Ac\ UtTihered rnent i^ IS order heiicver mterisl lliere is lureln' apjjropriated out of any money in the Treasury nut dtlierwis" appropriated, to etfeet tiie exchanges of bonds pro- Miliil for in this Act, a sum not e\eeedin on deposit foi- the security of circu latiiifj; notes, anil upon which an amount of circulating notes has hreii issued less than the ])ar value of the bonds, shall be entitled, upon due apjilication to the Comptroller of the Currency, to nceivc additional circulatinj^f notes in blank to an amount which \u]\ increase the circulating notes held b\ such association to the [)ar value of the bonds deposited, such additional notes to he held and treated in the same way as circulat Ini^ notes of national banking;' associations Ik relof'r)re i-sued, and subject to ill the ])ro\isi(Uis of law aff'ectin;^' such notes: /'/or/f/ci/, 'I'hat iiothinfX lurein lontaimd shall be construed to modi("\ or I'epeal ihe provisions of section tift\-one hundred and si\tv sexcn of the Uevisid statutes of the I'nited states, auth.iri/iii;^- the (Omptroller of the ('iirrencv to nijulre ailditional dejiosits of bunds or of lawful money in case the market \alu( of tlu Ixiiids h( Id to sicure tli( ciiculatmj; notes shall fall below the par \ahii' (d' the cir( lilat iii^ notes outstanding- for which soi'h lione it ,nas«„,ohv n.ncurnnt action of the lea.hng comnuTcial nations of the «orld an. I at a r/dN. uhlel, shall insure relali\e xalue I.etue.n oold and siKcr. Appro\.d. .Aiareh I V. VMM). '•omW/'/ fur- any sudi exccet! the y paid in: ; prL'scribod ing a...-,oci,i- 1 under the t'd with tiir ' "f" l)ul)li<' ; to onahiu c cxisti'iicc. I, ciffhtcrll Jaiik wliich itlidraw its (circulation K'll r cenhni! tcs on its idred and tended to >u\ when- to securr d nations Ti t III jxt .t r APPKNDIX II FEDERAL RESERVE ACT An Act to provide for the cstablislimeiit of Federal reserve banks, to li.riii^li an elastic currency, to att'ord means of rediscountin^ coniiiier! rve Hoard; the term " district " shall he held to mean Federal II serve district; the term '* rescne bank" shall he liekl to HP an Federal reserve hank. Kl'.DKK \I. KKSKRV!'. DISTIUCTS. Skc. 2. As soon as practicable, the St cretary of tlio 'I'reas- 'V, the Secretary of Agriiulture and the ('omplroliir of the • iirrencv, Jicting as "The l{estM-ve Hank Organl/ation ("om- niittec," shall designate not hss than eight nor more than twihe cities to be known as T'ederal reserve cities, and shall dixlde the eontinrntal I'nited States, excluding .Alaska, into districts, each • hstrict to contain btdy one of such I'ediral reserve cities. The determination of s.ild orgatii/at ion conmiiHee shall not be suli- ■ ct to review except by the I'ederal Ueserve Hoard when or- £49 §1 !l w- .5)0 APPENDIX ffan.zcl: rrovulcch Tl.ut the districts shall l.e apportioned wifch due rc^^ird to tlie coi.veiii.ncc and customary course of business and sliall not necessarily be coterminous with any State or States. The districts thus created may be readjusted and new districts may from time to time be created by the Federal Re- serve Board, not to exceed twelve in all. Such districts shall be known as Federal reserve lr,rt .hall be required uifhln thirty .lav. after noil.... fr.,m ♦li" organization committee, to subscribe to the capital stock of .such Federal res,.rve ba.ik in a sum e.,ual t., six per centum of the paid-up .apltal .to. k and sur,,Ins of such bank, one-sixth <-f the subscription to be payabl,. on call of th. organization '•;"""""'" "•• "'■ '1'^' I-'*'"-''! H'— -v.. Hoard, .n..-slxth within -H.,,. „„,nii,s an.i one-sixtl, ,,,thln six months thereaft-r, and tlie remain.ler of the subscription, or any [..it thercf, shall be APPENDIX Miliiict to call when deemed necessary by tlie Federal Reserve liuiird, said paymeiils to be in ^old or <^old certificates. The shareholders of every Federal reserve hank shall he hild iiuiividually responsihle, equally and ratably, and not one for aiiotlier. for all contracts, debts, and ensas^^nients of such bank t,i the extent of the amount of their subscriptions to such stock ;it the par value thereof in addition to the amount subscribed, wliether such subscriptions have been paid up in whole or in part, inider the provisions of this Act. Any national bank failing to si<,niify its acceptance of the terms of this Act within the sixty days aforesaid, shall cease to ait as a reserve ar offi'^crs^ for nnv ,;^;;::;-; ■:■.:: ■■■: j ■••: r ■■•••■- . liability or penalt\ which shall Iiave been previously inc-irred. Should the subscriptions by banks to the stock of said Fi.leral 552 APPENDIX m\ reserve banks or any one or more of them be, in the ju,Ig,„ent oi the or^ran.zation co.n.nittee, insufticic.nt to provide tlie amount of capital rc.i„ire,l therefor, then and in Ihat event the sai.l organization committee may, under conditions and regulations to he prescribed by it, offer to public subscription at par such an .m>ount of stock in said Federal reserve banks, or any one or ^■H.re of them, as sai.l committee shall determine, subje'ct to the same conditions as to payment and stock liability as provided lor member banks. No individual, copartnership, or corporation other than a "'-"'';••• >;""1^ of it. .hstrict shall be permitte.l to subscribe for or to hold at any tim.. more than $i>r,.()()() p^u- value of the stock '" any F,,|eral reserve bank. Such stock shall be known as pubhc stock and may be transferred on the books of the Federd reserve bank by the chairman of the board of directors of such bank. Shoul.l the total subscriptions by banks and the public to the stock o said r-ederal reserve banks, or any one or more of thenK -e, m the judgment of the organization committee, insufficient o provule the amount of capital required therefor, then and in hat event the said organizati.,n committee shall allot to the n, .d States such an amount of said stock as said committee shall .letenmne. Said rnifcl States stock shall be paid for at par out of any ,„„„,, ,•„ ,„, Treasury not otherwise appropri- aU., and sail be held by the Secretary of tl.TreasurvLl d sposed of for the benefit of the T'nited States i„ ..ch „,;„„..•, at such nnes and at su.h price, not less than par. as the Secre- tary of the Fivasury shall determine. St.ck not held by member banks shall not be entitle.] to votiW power. " The Federal Reserve Roard is hereby en,p,n ered to adopt and promulgate rules an.l regulations governing the transfers or said stock. No Federal reserve bank shall commence business with a sub- scribed capital l.ss than .« KOOO.OOO '|-| :,...:_.. , serve districts and Fc.leral reserve cities shall not'l^^in^tnu'cl as changing the pres..nt status ,.f reserve cities ami central APPENDIX r).y.] r, ~,rve cities, except in so fur iis this Act cliiuist'^ tlie amount of reservfs tiiat may be carried with approved reserve aral Reserve Hoard. The reserve bunk shall designate one of the directors as manager. FKDKKAl, UlSKKVl'. HWKS. Sf.c. 4. \Vhei> the organization committee shall have estab- lish' li Federal resirve districts as jjrovided in section two of this Act. a certificate shaH be tiled with the ("omptroller of the Currencv showing the geographical limits of such districts and the Fedi ral reserve city designateil in each of such di-tricts. The Comptroller of the Currency shall fhennipon cause to be .i: 1 1. ,>i I, ..i..,l 1. .];.)•-;,') .■•..) to such other banks (Kclared to be eligii)le by the organization connnittee which may apply therefor, an application blank in 554 APPFA'DIX :^'4 Fr ^.^heii Hie minimum amount of caxAi'i] ^frwl- ^ -i , , "'.■» A- f„. .„„ „,.,.,„„„„„ „, ,,„;f"!i:' tr I'* , ;,', ;"-'7° '■'■ -"-'l "". i. lo a(l„,,t and use a corporate seal Second. To lu.ve .ucce.sion for . period ,r t.entv ^ea^. APPENDIX .).).> ■Inch hlaiik 1 of diroc- lorlziiig a «-^i've bank provisions cribcd hy Junk shall committee ions liave tion, and 'uls, make state the ■lit of the 'I've bank unk is to nnber of phice of -', and of of such ribed by )le those ribed or Federal Iiis Act. I^fed be- lie ; and uthenti- I to the d care- r of the mil be- i^nated Vears from its organization unless It "is sooner dissolved by an Act of Congress, or unless its franchise becomes forfeited by some violation of law. Third. To make contracts. Fourth. To sue and be sued, complain and defend, In any court of law or equity. Fifth. To appoint by its board of directors, such officers and •uij)loyees as are not otherwise provided for in this Act, to (liHne their duties, requiie bonds of them and fix the penalty tliereof, and to dismiss at pleasure such officers or em})Ioyees. Sixth. To prescribe by its board of directors, by-laws not in- consistent with law, rcgulatin<:f the manner in which its general business may be conducted, and the privileges granted to it by law may be exercised and enjoyed. Seventh. To exercise by its board of directors, or duly au- thorized officers or agents, all powers sjxclfically granted by the provisions of this Act and such inci<)ental powers as shall l)e necessary to carry on the business of banking within the limitations prescril)ed by this Act. Eighth. Upon deposit with the Treasurer of the United States of any bonds of the United States in the manner pro- vided by existing law relating to national banks, to receive from 'he Comptroller of the Currency circulating notes in blank, registere.;6 APPENDIX r, I: Tlio hoard of directors shall perform the duties usually up- pertaiiiiii<^r to the office of directors of hanking associations and all such duties as are prescrihed hy law. Said board shall administer the affairs of said bank fairly and impartialiv and without discrimination in favor of or against any member l)aiik or banks and shall, subject to the provisions of law and the orders of the Federal Reserve Board, extend to each member bank such discounts, advancements and acconuno- dations as may he safely and reasonably made with due regard for the claims and demands of other member banks. Such hoard of directors shall be selected as hereinafter speci- fied and shall consist of nine members, holding office for three y»ars, and divided into tliree classes, designated as classes A, 1} and C. Class A shall consist of three members, who shall be chosen by and be representative of the stock-holding banks. Class H shall consist of three members, who at the time of their election shall be actively engaged in their district in com- merce, agriculture or some other industrial pursuit. Class C shall consist of three members who shall be designated by the Federal Reserve Roard. When the necessary subscrip- tions to the capital stock have been obtained for the organiza- tion of any Federal reserve bank, the Federal Reserve Board shall appoint the class C directors and shall designate one of sucli directors as cliairman of tlie board to be selected. Pond- ing the designation of siich cliairman, the organization com- mittee shall exercise the powers and duties appertaining to the office of chainnan in the organization of such Federal reserve bank. No Senator or Representative in Congress shall be a member of the Federal Reseine Hoard or an officer or a director of a Federal reserve bank. No director of class B shall be an officer, director or employee of any bank. No director of class C shall be an officer, director, employee or stockholder of any bank. APPENDIX 557 Directors of class A iind class B fliall be chosen in tlic follow- iii(r manner: Tlic chairman of the hoard of directors of the F dcral reserve li.uik of the district in which the hank is situated or, pending; the appointment of such chairman, the organization conmiittec shall classify' the member banks of the district into three ueh bank. At the first meeting of the full board of directors of each Federal reserve bank, it shall ho the duty of the directors of classes A, B and C", respectively, to designate one of the mem- bers of each class whose term of office shall expire in one year from the first of January nearest to date of such meeting, one uhosc term, of office shall expire at the end of two years from said date, and one whoso term of office shall expire at tlic end of three years from said date. Thereafter every director of a Federal reserve bank chosen as licreinbefore provided shall hold office for a term of three years. Vacancies that may occur in the several classes of directors of Federal reserve banks may be filled in the manner provided for the original selection of such directors, such appointees to hold office for the unexpired terms of their predecessors. STOCK ISSl'KS; IXCRKASK AND nKCRKASE OF rAPITAL. Sf.c. .'5. The capital stock of each Federal reserve bank shall he divided into shares of i^lOO each The outstanding capital stock shall be increased from 'ime to time as member ])anks increase their capital stock and surplus or as additional banks become members, a. id may be decreased as member banks reduce their capital stock or surplus or cease to be members. Shares of the capital stock of Federal reserve banks owned by member banks shall not be transferred or hypothecated. When a mem- :;r: ;;.;::r. :::\ i \.:\~'^ ~ ■■ ' .:.••••• ; - upon subscril)e for an additional amount of capital stock of tlio Federal reserve bank of its district efjual to six per centum of i ■:|1. 15 .560 ArPEXDIX the said Increase, one-half of said subscription to be paid in the manner hereinbefore provided for orij^jnal subscription, and one-half subject to call of the Federal Reserve Board. A bank a{)plyin<; for stock in a Federal reserve bank at any time after the organization thereof nnist subscribe for an amount of the capital stock of the Federal reserve bank cfjual to six pn- centum of the paid-up capital stock nnd .surj)lus of said appli- cant bank, pavinf,^ therefor its par value plus one-half of nr.9. per centum a month from the period of the last dividend. Whdi the capital .stock of any Federal resen-e bank shall have be. n increased either on account of the increase of capit.al stock of member banks or on account of the increase in the number of member banks, the board of directors shall cuise to be executed a certificate to the ("omptroller of the Currency showing the increase in capital stock, the a, Mount p.iid in, and by whom I)ai(l. When ;i member bank reiluces its capital stock it shall surrender a ]irnj)ort ionate amount of its holding in the capital of said l''((ler,il res. rve bank, and «hen a i ,!inber bank voluntar- ily licpiidates it shall surreiuler all of ils holdings of the capital stock of said Fed.ral reserve bank ;uid be ndeased from its stock subscription no^ f)reviously called. In either case th.> shares surrendered shall be citiceled and the member bank shall receive in payment th.refor. under regulations to b." pr.'scrib. .1 by the I'.deral Reserve Hoard, a sum e(|iial to its cash-p.uid sub- scriptions on the shares suncndered and one-half of on.^ j)cr centum a month rn.ni the period of the last dividend, not f.i exce.'d the book vain.' theriof, I. ss any liability of such member bank to the 1'. .1. ral reserv.' bank. Si.-. G. If any mi niber bank shall be declared insolvent and a receiver appoint..! th. n f.u-. Ww stock held |,v it in sai.l I'Vdcral reserve bank shall be canciled. without impairmi'nt of its liabilit\. and all cash-paid Mib-cription^ on said stock, with one-half of one [>. r .■entuin p. r month from the period of last (livid, nd. not to I'xce.'d ti,,. l,ook \ahi.' t''er.'.)f. sliall be fir-' •ipph. .1 to all debts .if tln' insiilvciit in. .n.!,.. r !..!.;l I,, tl... I.'.-L,^,.! reserve b.ank. .and the bai.ance, if Miiy. shall be paid to tli.' receiver of the insolvent bank. Whenever the capita! stock of a APPENDIX 561 IVdcral rcscn-e hank is reduced, either on ;iee<)iiiit of a rtdiu- tioii in capital stock of any inei.ilier l)ank or of tlie liquidalioii or insolvency of such i)ank, the hoard of chrectors sliall eaii-i to he executed a certificate to the ("onif)trolh'r of tlie Curreriev showing such reduction of capital stock and the amount repaid to such hank. niVISIOX OF KARNIXr.S. f' Si:r. 7. After all necessary i \f)enses of a I'ederal reserve hank have i)een j)aiil o.- providhall he (iititled to receive an animal divid. nd of >i\ per ceiituin on the paid-in capital stock, whicii dividend -liall i)e cuniiilatlve. After the aforesaid dividend claims have heeii fully imt, a . the m f earnings shall he paid to the Fnited States as a franchlx' tax, ( Acept that one-half of sucli net earnings shall he paid into a surplus fluid until it >hall amount to forty j)er centum of tiie paid-in capital stock of such hank. The net earniners derived l)y the T^nitiMl States from Federal reserve hanks shall, in the discretion of the Secretary, he used to supplement the gold reserve held against outstanding United States notes, or shall he applied to the reduction of the out- stmding honded indi'htedness of the rin'ted Statis under regu- lations to he prescrihed hy the Secretary of the Treasurv. Should a Federal reserve hank he dissolved or go into liipilda- tion, any surplus remaining, after the payment of all ddiU, ili\ldend reciuirements as lieriinhefore |)r()vided, and the par \alu{> of the stock, shall he paid to and liecome the j)riii)rrt\ of the I'nited States and shall he similarly aj)plied. Federal reserve hanks, inchwiing the capital stock and sur- jilus therein, and the income derived therefrom shall he oxem[)t from Federal, State, and local taxation, except taxes upon real 'state. Si:c. M. Section fifty-one hundrid and flft\ ''our, rnitfd States Itcvised Statutes, is herehv am. ndrd to r< at(){ K of such bank or banking association, with the approval of the Comptroller of the Currency l)e converted into a nai onal banking association, with any name approved by the Comptroller of the Currency: Provided, hozccvir. That said conversion shall not be in con- travention of the State law. In .such case the articles of asso- ciation and organization certificate may be executed by a major- ity of the din ctors of the bank or banking institution, and the certificate shall declare that the owners of fifty-o"e per centum of the capital stock have authorized the directors h) make such certificate and to change or convert the bank or anking insti- tution into a national association. A majority of the directors, after executing the articles of association and the organization certificate, sh dl have power to execute all other papers and to do whatever may be re(juired to make its organization perfect and I'ompli'te as a national association. The shares ot any such bank may continue to be for the same amount each as they were before the con\ersion, and the directors may continue to be di- rectors of the association until others ar(> elected or aj)pointed in accordance with the provisions of the statutes of the United States. When the Comptroller has given to such bank or bank- ing association a certificate that the j)rovisions of this Act have been complied with, such bank or banking association, and all its stockhcldfi's, offi('( rs, and emj)loyces, shall have the same powers and privileges, and shall be subject to the same duties, liabilities, and regulations, in all respects, as shall have been prescribed by the Federal Reserve Act and by thi- national bank- ing Act for associations originally organized as national bank- ing associations. STATK HA.NKH .\S MKMIIKRS. Skp. 9. Any bank incorjiorafed by special law of any State, or organizi'd undi r the /general laws of any State or of the ArrENDix 56;] Iiiitcd States, may tn.ikc application to the reserve bank organi- zation committee, pending organization, and thereafter to the I'lderal Reserve Board for the right to subscribe to the stock of !ir Federal reserve I;ank organized or to be organized within the Federal reserve district where the applicant is located. The organization committee or the Federal Iteservc Board, under Mich rules and regulations as it -nay prescribe, subject to the provisions of this section, may permit the applying bank to be- come a stockholder in the Federal reserve bank of the district in which the applying bank is located. Whenever the organiza- tinii committee or the Federal Reserve Board shall permit the .ipi)lying bank to become a stockholder in the Fi>deral reserve li.itik of the district, stock shall be issued arid paid for under the rules and regulations in this Act provided for national banks uhich become stockholders in Federal reserve banks. The organization committee or the Federal Reserve Board shall establish by-laws for the general government of its conduct ill acting upon ap[)lications made by the State banks and bank- ing associations and trust companies for stock ownership in l"((leral reserve banks. Such by-laws shall require applying liiiiks not organized under Federal law to comply with the re- M rve and capital recjuirements jmd to sui)mit to the examination and regtdations prescribed by the organization committee or by the I'sderal Reserve Board. No applying bank sh/dl be ad- mitted to membership in a Federal reserve bank unless it pos- V' ss( s a paid-uf) unimpaired capital sufficient to entitle it to lireome a national banking association in the place where it is Mtiiated, under the provisions of the national banking Act. Any bank becoming .i menil r of ,i Federal reserve l)ank under Ihe provisions of this section shall, in addition to the regulations and restrictions hereinbefore f)rovide(l, be required 'o conform to the provisions of law im|)osod on the national Iriiiks respecting the limitation of ii.'ibiiiiy which mav be in- ■ urred by any person, firm, or corporation to sucli b.mks, the ii'ihibition against making |)urchase of or loans on stock of leh banks, and the withdrawal or impairment of capital, or the payment of unearned dividends, and to such rules and regula- l! o6i APPENDIX tions as the Fctlcral Hcscr\c Hoard may, in pursuance thcrt'of, pn scribe. siieli l)anks, and the officers, agents and employees tlicrcof. shall also he subject to tlie provisions of and to the penalties prescribed l)y sections fifty-one hundred and ninety-eight, fiftv- two hundred, fifty-two hundred and one. and fifty-two hundred and eight, and fifty-two hundred and nine of the Revised Stat- utes. The member banks shall also be required to make reports of the conditions and of the payments of dividends to t!ie comp- troller, as provided in sections fifty-two hundred and eleven and fifty-two hundred and twelve of the Revised Statutes, and shall l)e subject to the j)enalties prescribed by section fift- -two hun- dred and thirteen for the failure to make such report. If at any time it shall appear to the Federal Reserve Rn.ird that a member bank lias failed to comply with the provisions of this section or the regulations of the Federal Reserve Board, it shall be within the power of f id board, after hearing, to require such bank to surrender .. siock in the Feileral reserve hank; upon such surrender the Federal reserve bank shall pav the cash-paid subscriptions to the said stock with interest at the rate of one-half of one per centum per month, computed frnni the last (ll\i(lend, if earned, not to exceed the book value thereof, less any liability to said I'Vderai reNcrve bank, except the suii- scription liability not previously called, which shall be caiu-ided. and said Federal reserve bank shall, upon notice from the Federal Reserve Hoard, be requind to suspend said bank from further [)rivileges of meinlx isliip, aiid shall within thirtv davs of such notice canc(d and retire its stock and make pavmeiit therefor in tlie manner herein pro\ ided. The l-'ederal Reserve Hoard may restore meMibership u[)on due proof of compliance with the conditions imposed by this section. K* FrnriiM. iitsmvi. iioahi). Srr. 10. A FicHM-al Heservp Rna.rd !s lierehv rre.itod »r!>!:l'. shall <-onsist of seven members. Including the Secretarv of the Trcusury and the ('omi»l roller of the Currency, who dmll !'> c— Vll— :«) ArrENDix ofi5 nidiihcrs ex officio, and five iiieinl)ers appointed by the President of the United States, by and with the advice and consent of Ihc Senate. In selecting the five appointive members of the I'.dcral Reserve Board, not more than one of whom shall be .selected from any one Federal reserve district, the President s.liall have due regard to a fair representation of the different commercial, industrial and geographical divisions of the coun- t'v. The five members of the Federal Reserve Hoard appointed l)V tlie President and confirmed as aforesaid shall devote their entire time to the business of the Federal Reserve Board and shall ciich receive an annual salary of $Ui,()0(), payable monthly fi.nvther with actual necessary traveling expenses, and the ( ninj)troll( r of the Currency, as ex officio member of the Federal li.M'rve Board, shall, in addition to the salary now paid him lis Comptroller of the Currency, receive the sum of $7,000 an- niiailv for his services as a member of said Board. The members of said board, the Secretary of the Treasury, the Assistant Secretaries o" the Treasury, :ind the Comptroller iif the Currency sh.ill be ineligible during the time they are in otHce and for two years tlurealter to hold any office, position, or employment in any member i)ank. Of the five members tlu's :i|)|)ointed by the President at least two shall be perscms ex- perienced in banking or finance. One shdl be desigiiated by Mie President to serve for two, one for four, one for six, one for eight, and one for ten vears, and thereafter each member so .ippointed sh !1 serM- for a term of ten yiars uidess sooner re- moved for t'ause by the President. Of the five persons thus .•i|)i)ointed, one shall be designated liy the President as governor iiid one as vice iroveinnr of the T'edeivd Reserve Board. The L;nvernor of the Federal Reserve Board, subject to it-, super- \l>ion, shall be ilie active executive officer. The Secretary of the Treasury may assign offices in the Department of the Treas- nrv for the use of the FeUi>MTiin- Tu THr «<.tTn or oniCP. M' 'I'lie I'ederal Re.ervc Board shall liave power to levy !|l seMU Iv upon the i'edi r.il resi'rve banks, in [iroportion to their .,../ 566 ArPFADIX ■ ■■■ [ i ' H !»: capital stock and surplus, an assessment sufficient to pay its estimated expenses and the -^jilaries of its meml)ers and employees for the half year >uccee(iiiirp the levyin<^ of such assessment, ton-ether with any deficit carried forward from the preceding lialf year. The first meeting of the Federal Reserve Board shall be held in Washington, District of C"oluml)ia, as soon as may be after the passage of this Ac^ at a date to l)e fixed by tlie Kesene Bunk Organization I'onnnittee. The Secretary of the Treasury shall be ex of'icio chairman of the Federal Reserve Board. No mem- ber of the Federal Reserve Board shall be an officer or director of any bank, banking institution, trust company, or Federal reserve bank nor hold .stock in any bank, banking institution, or trust company: and before entering ujjon his duties as a mem- ber of the Federal Res( rve Board he shall certifv under oath to the Secretary of the 'J'reasury that he has complied with this requirement. Whenever ;i vacaiuy shall occur, other than bv expiration of term, among the five members of the Federal Reserve Board appointed i)y the Fresident, as above provided, a successor shall be a})pointr(l liy the President, with tlie .idviee and consent of the Senate, to fill such vacancy, and when ap- [)oiided he shall hold oflice for the unexpired term of the mem- ber whose l)lace he is sdicted to fill. The Fres'd.nt shall !i;ive powtr to fill all v ancies (hat may li.ipixii on the I'.drral Rcs.rvi Hoard during the recess of tlu- Stnate, by grarding connnissions which shall expire fhirtv days after the next session of the Senate convenes. Nothing in this A, I contained shall be construed as takiii Secretary of the 'I'reasnry which relate to the supc rvlsior!, management and control of the 'I'reasury Departm.'rit and Iiureaus niider sucli department, and wh.erever any power v.stdl by this Act in llie V'ederal l{(serv> Hoard or the I'ederal reserve .agent appears tn conflict with the powers of the Secretary of the Treasury, such powers .siiaii be exercised sub ject to tiie supervision and (a)ntrol irv. )f the Seeivl The I'ederal Reserve Board shall innuallv make a full renoit APPENDIX 567 of its operations to the Speaker of the House of Representtatement showing the condition of each Federal reserve bank and a consolidated statement for all Federal reserve banks. Such statements shall show in detail the assets and liabilities of the Federal reserve banks, single and combined, and shall fur- nish full information regarding the character of the money liild as reserve and the amount, nature and maturities of the I)aper and other investments owned or held by Federal reserve banks. (b) To permit, or, on tlie aHirmat!\e vote of at least five members of the Reserve Board, to re<|iiire I'ld-ral reserve banks to rediscount the discounted ])a|)(r of other Federal reserve banks at rates of interest to be fixed by the Federal Reserve lioard. (c) To suspend for a period not exceeding thirty days, and from time to time to renew such suspension for periods aot :n .1 Act : Prov'uJid. That it shall establish a graduated tax ujxm the amounts bv which the reserve requin inents of this Act may rA\H APPENDIX r^ be porr.,ttod to fall below the level hereinafter specified: ./,./ pror.Jal furt,,rr. That «he„ the ^old reserve held against Fe.l- -al reserve notes falls hehnv forty per centu.n, the Federal ii-erve Board shall establish a .raduat. d tax of not „,ore than <"'e per eent.un per annum upo.i such deficiency until th. "".'■"'^ ''•'"/;; \'"'-^>-*"" -"> --)>alf per centun;, and when s.K reserve falls belo. thirty-two and one-half per centun,, a tax at he rate uu.reasu.o.ly of not less than one and one-half per -ntun, per annun. upon each two and one-half per centun, or -• ";; """- t'-t such reserve falls below thirty-two and ;-;''^P--un, TlH. tax shall be paid by the reJerve bank, 't «lK. reserve bank shall a.hl an a„u>unt ec,ual to said tax to H. rates of interest and discount fixed In' the Federal Reserve iJoard. (.1) To supervise and regulate through the bureau under Ih. .harge of tlu. (-on.ptroller of the Currencv the issue and re- -nnent nf Federal reserve notes, and to p,-escribe rules and y^adat.ons under which such not,. „,.y be deliven.! by the Comptroller to tlu. l.^.deral reserve agents applying theref^n-. (e) lo adCi) riM.-ulations for the safeguarding of all collateral, bonds, Federal nscrve notes, money or property of any kind deposited in the liaiids of such agents, and said board shall perform the duties, functions or services specified in this Act, and make all rules and regulations necessary to enable said board ctl'ectively to [iirform the same. ( j) To exerci.ie general supervision over said Federal reserve hanks. (k) To grant by special permit to national banks applying tiiirefor, when not in contravention of State or local law, the right to act as trustt'c, executor, administrator or registrar of stocks and bonds under such rules and regulations as the said imard may prescribe. (1) To iniploy such attorneys, experts, assistants, clerks, or otliir employees as may be deemed necessary to conduct the liiisiness of tlie board. All salaries and fees shall be fixed in advance by said board and shall be paid In tli(' same manner a- the salai'ies of the members of said board. All such attor- iM vs, ex{)erts, assistants, clerks and other employees shall be a[)pointed without regard to the provisions of the Act of Janu- arv sixteenth, eiglitecn hundred and eighty-three (volume twen- l\ two United States Statutes at Large, page four hundred and three), and unendmeuts thereto, ur any rule or regulation made in pursuance thereof: I'mT'idiil. 'J'hat nothing herein shall prevent the President from placing said employees in the classi- iied sen ice. FKni-.RAI, ADVISORY COVXCIL. Dr.r. IS. There is h(>reby created a Federal Advisory Council, which shall consis. of as many meml)ers as there are Federal reserve districts. Each Federal reserve bank by its board of directors shall annually select from its own Federal reserve district one member of said council, who shall receive such com- .1 ..f i:. |niisiii mil .tini .liii'Wancc.-, as iii.;y ;>< :;\;;; :;; :;:~ - tors subject to the approval of the Federal Reserve Board. The meetiiiiTs of said advisi.rv cmuiicII shall be held at Washing- 570 APPENDIX I:r5- ton. District of Columbia, at least four times each year, und oftener if called by the Federal Reserve Board. The council may in addition to the meetin^rs above provided for hold such other meetin7l industrial or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Federal Reserve Board to have the ri<.ht to detcmiine or define the char- acter of the paper thus eligible for discount, within the mean- in.i,iii iiavc powcr : fa) To deal In gold coin and l.ulllon at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, ' 5»»*!*»«W«»»'r? ArPEXDlX :,i.i ^old coin, or gold certificates, and to contract for loans of rrold coin or bullion, givinrr tlicrcfor, Mhen necessary, acccpt.ihlo security, including tlie liypothccation of T'nitcd States bonds (ir otlicr securities wliich Federal reserve banks are authorized toi Id; (b) To buy and sell, at lionie or abroad, bonds and notes of the United States, and bills, notes, revenue bonds ar.d war- rants witli a maturity from date of purchase of not exceeding six months, issued in ;• ;ticipation of the collection of taxes or in anticip ition of tlio receipt of as-urcd revenues by any State, county, district, political subdivision or municipality In the continental United States, including irrigation, drainage and reclamation districts, such parchases to be made in accordance with rules and regulations prescribed by the Federal Reserve Board ; (c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of com- mercial transactions, as hereinbefore defined; (d) To establish from time to time, sul)ject to review and determination of the Federal Reserve Board, rates of discount to be charjicd bv the Federal reserve bank for each class of paper, whiel) sh.nU be fixed with a view of accommodating com- merce and business ; (e) To estaljlish accounts witli other Federal reserve ban. s for exchange purposes and, with the consent of the Federal Reserve Board, to open and maintain banking accounts In foreign countries, appoint correspondents, and estabhsh agencies in such countries wheresoever it may deem best for the purpose of purchasing, selling and collecting bills of exchange, and to buy and sell with or without its indorsement, through such correspondents or agencies, bills of excLinge arising out of actual conmiercial transactions which have not more than ninety days to run and which bear the si-^- ature of two or more re- sponsible parties. .^^^^^.. .574 AITENDIX GOVKRyMKNT DKrOSlTS. Sec. 15. The moneys he'd in tlic -general fund of tlic Trcas- nrv, except the five per eentuni fuiul for tlic redemption of outstanding national-lii-nk notes and the fund., provided in this Aet for the redemption of Federal reserve notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Sec- retarv of th.e Treasury, sliall act as fiscal agents of tlie T"nit< d States; and the revemies of tlie (iovermuent or any part thereof may be deposited in such banks, and disbursements m.ay be made by checks drawn af^ainst such deposits. No public funds of the I'liilip' Mie Islands, or of the postal •savings, or any government fluids, shall be deposited in th:^ con- tinental United States mi .'i-iy bank not Ijilongin^ to the system established by this Act : I'rov'uhd, Jimc-ci'rr, That nothin^r in this Act shall be construed to deny the ri^ht of the Secretary of the Treasury to use member banks as depositories. XOTK iss Sec. 1(). Federal reserve notes, to bo issued at the discretion of the Federal Reserve Board for the purpose of makinj^ aerve bank. Any Federal reserve bank may make n])plication to the Inrnl Federal reserve afrcnt for sucli amoimt of the I'ederal reserve notes hereinbefore prov'd-d for as it may re(|uire. Sik li appli- cation sliaii lie i pnnied with a tender to i f i- local i.iii rai reserve .ayenl oi ,-■ Uicral m amount e ajjplied for and i>.su(({ pursuant to The collateral security tluis otFered shall cepteil for rediscount undi r the provisions '„f section thirteen of this Act, and the Federal reserve agent >h,ill each day notify the Federal Reserve Board of all issues ;.:ui withdrawals of Federal reserve notes to and hy the Inderal n.,erve hank to which he is accredited. Tlu- said Federal Re- serve Board niav at any time call upon a Fcl.ral reserve bank for ad.'itional security to protect the Federal reserve notes issuetl to it. Fvery Federal reserve hank shall maintain reserves ni gold or lawful money of not less than thirty-fivr p.r cm, turn against it> deposits and reserves in gold of not K >> Wv.n forty per or.tum against its Federal reserve notes in actual circulation, ;m,l not offset hv gold or lawful money deposited with th. Fed- .ral reserve agent. Notrs so paid out shall hear ui)on their faces a distinctive letter and srrial nu.nl)er. which sliall he as- signed hv the Federal Reserve Hoanl t., ...•h ]■ , (hral ivMrvc hfuik. Whenever Federal rrserve notes issued through one Fed- eral reserve hank shall l)e r.cix.d l.y another Federal reserve hank the, shall he promptly refurm.l f.)r credit or redemption to the I'edend resir\r hank through which they were originally issued. No Federal r.s.rve hank shall pay ovit notes issuea fhrough another under penalty of a tax of ten per centum Uj.on \\h' face xalue of notes so pai.l out. Notes presented for re- ,i,M„ption at the Trra ury of th-.- Fnited States shall he paid out of the redemption fund and returne.l to the Federal reserve h.mks thr.nigh which they wen' originally issued, and thereupon such Fedeial reserve hank shall, upon demand of the Secretary of the Trea.sury. rcimhursc such r(ut>tan(hng. mamiam »iiii ii'e i re, -.,;;,, . ;t; ^-:;-.: .-.:: ■unount sufHcient in tiie .judgment of the Secretary to provide J 7 (5 APPEXDIX 4 :J1 for all rcdtniptions to he made hy tlie Treasurer. Federal re- serve notes received by tlie Treasury, otherwise than for re- demption, may he exchanged for gold out of the redemption fund lieniiiafter provided and r.tunird to the re.ser - hank througli which they were originally issued, or they ma he re- turned to such hank for the credit of the Ignited States. F(.i- eral reserve notes unfit for circulation shall he returned hy the I'Vdcral reserve agetits to the Comptroller of tiie Currency for cancellation and destruction. The Federal Reserve Board shall require each Federal reserve l)ank to maintain on deposit in the Treasury of the I'nlt.d States a sum in gold suflicient in the judgment of the Secretary of the Treasury for the redemption of the Federal reserve tiotes issued to such hank, hut In no event less than five per centum; but such deposit of gnjd shall he count, .1 and Included as part of the forty per centum reserve hereIni)efore recjulred. 'I'he hoard shall have the right, acting through the Fechral reserve agent, to grant in whole or in part or to reject entirelv the aj)plication of any Federal reserve hank for Federal reserve notes; !)ut to the extent that such application may he granted *!h' F((I,ral Ii,s,.n,. Hoard sjiall, (hrongh its local I'ederal re- serve agent, suppiv l-'ed.'ral reserve not.s to the hank so applv- ing, and such l)ank shall he charged with the amount of su. h notes and shall i)ay such rate of interest on sal.l amount as may he established hv the Federal Reserve Ro/ird, and the amount of such I'.deml reserve notes so issued to anv .such I-ank shall, upon d. liv. ry, together with such notes of such F((leral reserve bank as may be issued uiirl. r s,.,fi,,n eighteen of this Act upon security of Fnited Stales f«„ p.r centum (lov '^rnmcnt bonds, become a first ami paramount lien on all the assets of such hank. Any Fcfieral reserve bank may at any time reduce Its lia- bility for outstanding Federal reserve notes by depositing, with the Federal reserve agent, its Federal reserve notes, gold, g.)ld certificates, or lawful money of the Fnited States. F.d.r.d rcscrvp notc-s no deposited shall not he r.issucd, excejjt upon complian.e with the conditions of un original issue. ArPENDIX ^( I The Federal reserve agent shall hold such ffold. gold cer- tificates, or lawful nionoy iivailable exclusively for excliaiihall at the same time substitute therefor otiier like collateral of .,,ual amount with the approval of the Federal reserve agent under regulations to Lj prescribed by the Federal Resei-\e Hoard. In order to furnish suital)le note^ for circulation as Federal rescr^-e notes, the Coniptn.lK r oi the Currency shall, under the direction of the Secretary of (lie Treasury, cause plaies and (lies to be engraved in the best manmr to guard against counter- feits and fraudulent alteration , and shall 'oavo printed there- from an.l numbered such (inantities of sucli note, of the drnom- inations of .f.',, ^10, ^^li\ $')0, $100, as m ly be re.|uired to sup- ply the Federal reserve banks. Such notes shall be in form and tenor as directed bv the Secret y of the Treasury under the provisions of this Act and shall b.ar the distinctive num- bers of the several Federal reserve banks through -vliieh they are issued. When such notes have been prepared, they shall be deposited n tlu' Treasurv, or in (he subtreasury or mint of the I'nited States nearest the place of business of each Federal reserve bank and shall be held for tlie use of such bank subje.-t to the order of the Comptroll.r of the Currency for tlieir delivery, a> pn.- Mded bv this Act. The plates and dies to be prnmred by the Comptrnller of the Currency for tlie printing of sudi circulating notes shall remain nnd.T his control and direction, and the expenses necessarily incurred in executing the laws relating to the procuring of hJ^'" * APPENDIX such notes, and .ill other expenses incidental to their issue and retirement, shall i)e paid hy the i'ederal reser\ ■ lianks, and the Federal Reserve Board '■ U include in its cstlmale of expenses levied against the I'ed reserve banks a sufficient amount to cover the expenses hcrem provided for. 'i'he examination of plates, dies, hed pieces and sn foi Ih. and re.f^ulations relatintj to such examination of plate>, dii-' and so forth, of national-hank notes provided for in section fifty-one liuiuiixl and .>iventy-four llc.vix'd Statutes, is hereijy extended to include notes In nin provided for. Any appropriation heretofore made nut of the fjeneral funds of the Treasury for engravinjj; plates and dii s, the purchase of distinctive paper, or to cover any other expense in connection "ith the printing; of national-hank notes or notes provided for liv the Act (>f Alav tlilrlicth, nlintcrn hmidnd and ci;:^]!!. .iiid aii\ distinctive jiaper that may he on hand at the time of the ])assa^c (if this \(t may he u^cd in the discretion of the Secre- tarv for t!ic |)iir|)oses of this Act. and slioidd the appropriation- heretofore m nic he insufficient to met t the retjuirements of tin- Act in addilinn to clrculat in;j; noli s provided for hy exlstinfi law. the Secretarv is lu'rehy authorized to use so much of an\ funds in the Treasury not otherwise appropi i.ited for the j)nr pose of furnishinir the notes aforesaid: I'nn'i(Ui'i. Iimcircr. Tli.i nothin^j,- in this section contamed shall he construed as ex( nipt In^ national hanks or Federal reserve hanks from tlieir liabilit; to reimburse the I'niled States for any expenses incurred ii printiufif and issuing circula! inu,- notes. I'verv Federal reserve hank shall receive on deposit at pa from member banks or from Federal reserve banks checks am drafts drawn upon any of its depositors, ami when remitted h a Federal reserve l)ank, checks and drafts drawn hy any deposi t(u- in anv (>ther I'ederal reserve hank or member bank upo funds lo the credit of said depositor in said reserve bank o member bank. Nothinfr herein contain- d shall be construe ft.: nrolnbiti'ifr fi me'iiber bank from diaruinff its actual expens incurred in collecting and remittin<; funds, or for exclmnere sol to its patrons. The Federal Idscrvc Board shall, i)y rule, fi ATTKAniX 579 issue .ii'.il , Jiiul the cxptiiM ^ mount to oilli. and liftv-Dllr oxtcndtil M'al funds purclia 1' •otinection )vi(lccl for lUC of till' the Sccrc- opriatioii> its of tlii> y cxlstlni; icli of an V r tlic ))ur- cirr. That IS exi'nipt ir liiihility iicurrcd in isit at par checks and oniitfrd I)y iny doposi- liank iijion e liank or const nicd ml oxponsr luin whose checks arc cleared through tiie Federal reserve l)ank ,111(1 the char<;e which may he imposed ior tlie service of clearing or collection rendereil hy the Federal reserve l)ank. Tiie Federal Jlescrvc Board shall make and promulgate from time to time re<;ulations jroverning the transfer of funds and cliarfTcs therefor among Federal reserve hanks and tiicir I, ranches, and may at its discretion exercise the functions of a charing house for such Federal reserve hanks, or may desig- nate a Federal reserve haiJv to exercise >uch functions, and may ,.!>o re(iuire eacli such hank to exercise the functions of a clear- ing house for it- memher hanks. Sec. 17. So n.uch of the j)rovisions of section fifty-one hun- dred and fifty-nine of tlie Revised Statutes of the United States, and section four of the Act of dune tucntieth. eighteen liundred and .seventy-four, and section ciglit of tile Act of July twelflh, (ightcen hundred an:i\- from the jiassagr of this Act. .^nd at aiiv time during i jn riod of twmty \ <'.irs thereafter, any niem- lur bunk desiring to retire the whole or any part of its circu- Ming notes, may file with the Treasurer of the United Stales mi application to s. 11 for its accoimt. at par and accrued interest, Fnited States iiMud- securing circulation to he r. tired. Thr Treasur. r shall, at tho em! of each (piartorly period, furnish the F.d.r.d H(-erve Board with .i h>t of such applica- tions, and the Federal Reserve Board may, in its discretion. !(!uirc the Federnl reserve hanks to i)urchas.> such honds from • .■ banks whose applications have been filed \Nith thr 'I'rr.isunr ; least ten d.iys hefurr the end of any tpia'-terly prriod at :>so AJ'PENDTX wliirli the Ferlcral Reserve Roiinl may direct the purchase to t iiiadr: Proridcd That Federal reserve hanks sliall not he pei niittid to purcliasc an amount to exceed ^!.'.").()0(),()()() of sue hoiids in ;iny one year, and '.vliich amount, shall include i)oncl actjuired under section four of this Act liy the Federal reserv bank. Providr,] f/irtlicr. That the Federal Reserve Roard sliall alle to eacli IVdcral res. rve hank sUi'h proportion of such hond as the capital and ^urphis of such hank shall hcai- to the aii-<.T(. ^ate capital and siiri)Ius of all the I'l'deral reserve hanks. I pon noti( fi-oni the Treasurer of the aiununt of hone's s sold for its account, eacli memlur hank shall dulv assio-n aii transfer, in wi-itinif. such bonds to tlic Federal reserve ban purchasliio- flu. same, and such I'ederal reserve bank shall, there upon, di pdsit liwful money with the Treasurer of flie Fnitei States f(ir III,, pui-ehase j)rice of such bonds, and the Treasure shall pay (o the member hank selling- .sUch bonds anv balaiu' due after (Kchu'tinLj a sufficient sum to redeem its outstanding notes-- secm-ed by Mich I'luids. uiiich notes shall be canceled am jH-rnianently retired when redeiined. 'I he Inderal r serve banks purchasinf^' ^neh bonds sliall h permitted to take out ail amount of cireulat inj^f notes equal ti the jiar \ahie of such bdiid-. Fpoii the dej)osit with thi' Treasurer of the T'nited Stat(\s o bonds so jmrchased. or any bonds \v]t\\ \]\n circulat in;^- jiriviletri aetMiii-rd under s,,'!,,,,, f,,ur of this Act. anv Fefleral reservi I ank making; such deposit in the manner j)rovi(led by existinr l.'iu. sh.ill be entitled tr) reccive from the {'oinptioHer of tin Currency i n-ciilai in^r- notes in blank, re^^-istered and counter sifjned as prn\ idrd by law. «(|ud in amount to the par value ol the )>onds so deposited. Such notes shall be the oblij^^it ion- of the Federal reserve bank procuriiio- the same, and siiail l)c ir form prescribed by the Secnt.iiy of the Treasurv. and to th( same tenor and effect as national-bank notes now provided 1)\ lau. rh.ey shall be issudi and redee-n,.(| under the same lerni> and conditions as national-bunk ii!){e.s except that they i.h Iial APPENDIX 581 chase to he lot he piT- )() of such iudc I)(iii(is ral resLTvi; sliall allot lU'h hoiiiis the aii-n-rc- nks. f h()ii('s so issiu'ii ami uTve hank hall, then - tho T'nitrd 'l'r('a>iir( ]• i_v i>alaiici' 1 1 1 s t a n ( 1 1 M l;- iitek'd ami Is shall h." s (.'(jiial to I States of ;■ prlvilcov •al icscrsi' y (.'xistin^;' Irr of tli- I Colilltcl'- r \alii(' (if il)li<;'at ions sIkiII he Hi mil to thr oviilcd hv lino tl•I■!n^ thev .-hall I : I \h- limited to the amount uf tho capitai stock of the I'ldcral ri>ciVL' hank issuing tlnin. I'pon application of any Federal reserve l)aiik, approved I)y the Federal Reserve Hoard, the Seeretary of the Treasury may issue, in exelianpfc for I'nited States two per centum shall continue in force for a period not to excel (1 thirty years. For the i)urpose of making the exchange herein provided for, Ihe Si'cretai-. of the Treasury is authorized to issue at j)ar 'i'reasurv notes in couj)oii or registered form as he may pre- -erlhe in denomination-.^ of one hundred dollars, or any imilti[)lo thereof, heariui;- interest at the rate of thne pn- e. ntuin per tinum. payahle (juarterly, such Treastn-y notes to he ])ayalile not more than os.- y^'ar from tlie date of their issue in gold coin of the i)resent standard value, ami to be exempt n.s to principal and interest from the payment of all taxes and duties • 111 I 1 ■ 4 I , -, II lUeii liV Tlii:- .\i":, -i- **. vi; U tlie « mied rMale »roviti f IS I rom tax. {• IS m anv lorm tiv or under le. nninicipal or local lulhorities. And for the same purpose, the Secretary is aii- r,Hi APPENDIX thorizcd and empowered to issue T'luted States gold bonds a par, lKariii4•. Upon apph'cation of any Ftihral .eserve bank, approved h\ the Federal Keserve Hoai'd, the Secretary may issue at par sucl three per centum bond* in exchange for the one-year gold note: herein provided for. BANK RESERVES. Sec. 19. Demand dep(j>its witliiti the nuaninrr of this Ad shall com]»rise all deposits payal)le within thirty dav>. and tinii deposits shall comprise all depoMts payaide after tliirtv davs, and all savings accounts and c( rtificato (,i' deposit which an subject to not less than thirty days' notice before ])avmeiit. When the Secretary of the Treasury shall have otticially an- nounced, in such manner as h,' may i lect, the establishment of ;i Federal reserve bank in any district, every subscribing nienibei bank shall establish and maintain nservis as follows: (a) A bank not in a reserve or central reserve city as now or hereafter defined shall hold and maintain reserves etpial to twelve per centum of the aggregate amount of its demand de- posits and five per centum of its f ime deposits, as follows: In its vaults for ;i period of thirty-six months after said date five-twelfths thereof and permanently thereafter four-twelfths. In the Federal reserve bank of its district, for a j)eriod of twelve mo:dhs .after said date, two-twelfths, and for each suc- ceeding six inoidhs an additional one-twelfth, until five-twelfths have been so defjosited, which shall l)e the amount permaneiitiv reipiired. I-or a perl()(' of thirty-six months after said date the balance of flio ..,,. 1 111 • •. ,. . . . .j_. . . •'"" "•••."• '■■" •■-'••• •'' '•■' ■"■";; ■ auus, ui' m li.- rederai reserve l)nnk, or in national banks ;a reserve or central .serve cities as now defined l)v law. APPENDIX 58.*^ I bonds ut irty jL'iirs icral tuiior terms hirI l!s without proved l)v t p;ir such gold notes ' tliis Art . ;uid tiiin' irtv (i:i\-, whicli ai'i' .Muent. ieially an- iiiient of a g member y as now efjual til ■mand de- )ws : said date •-twrlftlis. })eri()d of eacli siic- L'-twelfths •marientlv e balance ' i''i'(i( rai ui . • serve After said thirty-six months perioci said reserves, other tlian tliuse liereinljefori' recjuired to be held in the vavdts of the meni- liir bank and in tiie Federal re;,erve bank, shall l)e held in the \aults of the member bank or in the Federal reserve bank, or in liith, at the option of the member l)ank. (b) A bank in a reserve city, as now or hereafter denned, vhail hold and maintain reserves equal to fifteen per centum of (lie. a'-^'fre'-'-ate amount of its demand deposits and ti'e per centum (if its time deposits, as follows: In its vaults for a period of thirty-six months after said date six-fifteenths thereof, and permanently thereafter five-fifteenths. In the Federal reserve bank of its district for a period of twelve months after the date aforesaid at least three-fifteenths, and for each succeedinn; six months an additional one-fifteenth, until six-fifteenths have b.en so deposited, which shall be the amount permanently required. For a period of thi^ty-^i\ months after said date tlie balance of the reserves may be held in its own vaults, or in the Fetleral reserve bank, or in national banks in reserve or central reserve cit'es as now defined by law. After said thirty-six months' period all of said reserves, ex- cept those hereinbefore required to be luld pennancntly in tiie vaults of the member bank and in the Federal reserve bank, shall i>e lield in its vaults or in the Federal reserve bank, or In both, at the option of the member bank, (c) A bank in a central reserve city, as now or hereafter defined, shall hold and maintain a reserve eciual to eighteen per centum of Die agj^^re^ate amount of its demand deposits and five per centum of its time deposits, as follows: In its vaults six-eighteenths thereof. In the Federal reserve bank scven-cio-htcentlis. The balance of said reserves shall be luld in its own vaults or in the Federal reserve bank, at its option. Any Federal resei-ve bank may receive from the member . ' ■ ,. i;., _ ^I...lf ,,f «.i/^l. iiwf ulllllcnf . hanks as i i -ni v"i .-,, noi crxicei::::^ •,•::-. ::•.:: --t eligible paper as described in section fourteen properly In- dorsed and acceptable to the said reserve bank. 584 APPENDIX If a State .)ahk or trust coinpaMv Is required hv tlic law of Its Statr t,. keep its reserves eitlar in its own vaults or with anotl.er State bank or trust ro,„pany, such reserve deposits so kept HI such State Link or trust eoinpany shall be eoustrued, «itiiiu the Hieaninn. uf this section, as if they were reserve de- posits in a national bank in a reserve or central reserve city for a penod of three years after the Secretary of the Treasury shall have officially announced the establishment of a Federil reserve bank in the district in which such State bank or tru>f company is situated. Kxcept as thus provi.led, no member bank sliail keep on deposit with any nonmember bank a sum in excess of ten per centum of its own paid-up capital and surplus. No "u.mber bank shall act as the medium or a-ent of a nonmember hank m ap})ly,ns for or receiving discounts from the Federal reserve bank under fl,e provisions of this Act .:cpt by permis- sion of the Federal IN serve Poard. The reserve carried by a m..nil)or liank with a Federal re- serve bank m.-.y, under the re,<,ndations aiul subject to such penalties as may b," prescri!,ed by the Federal Reserve Poard, be checked a-ainst arul withdrawn by such member bank for the purpose of meetin- existing? liabilities: Provided, horvevcr. That no bank shall at any time make new le)ans or shall pay any dividends unless and until tlie total reserve required by Liw is fully restored. In estimatincn the reserves required by tliis Act, the net I)alance of amounts du.. to and from other'banks sliall be taken as the basis for ascertaininir the deposits against wliich rcser^-es shall be determined. Pa lances In reserve banks due to member I'.u.ks sliall, to the extent lierein providod, be counted as re- serves. ^ National banks located In Alaska or outside the continental United States may remain nonmember banks, and shall in that event maintain reserves anliall, in that event, take stock, uiaintain reserves, and bo sul)j(Tt tt) all the other provisions of this Act. Sec. 20. So much of sections two and three of tlie Act of .Tune twentieth, eighteen hundred and seventy-four, entitled •• An Act fixing the anieunt of United States notes, providing for a redistribution of tlie national-bank currency, and for other purposes," as provides that the fund dep> ted by any national banking association with the Treasurer of the United States for the redemption of its notes shall l)e counted a^ a part, of its lawful reserve as provided In the Act aforesaid. Is hereby repealed. And from and after the passage of tlils .\ct ^uch fund of five per centmu slr.ill in no case be counted by any national banking association as a part of its lawful reserve. BAKK F.XAMINATIOXS. Sec. 21. Section fifty-two hundred and forty, United States Revised Statutes, Is amended to read as follows : The Comptroller of the Currency, with the approval of tlic Secretary of the Treasury, shall appoint examiners who shall exan.ine every member bank at least twice in each calendar year and oftcner If considered necessary: Pruvidcil horci-irr, 'Fhat the Federal Reserve Board may authorize examination by tlie State authorities to be accepted In the case of State banks and trust companies and may at any time direct the holding of a special examination of State banks or trust companies that are stockholders in any Federal reserve bank. The examiner making the examination of any national bank, or of any other inemhcT bank, shall have power to make a thorough examination of all the affairs of the bank and In doing so he shall have jiow.r to administer oaths and to examine any of the officers and agents thereof under oath and shall make a full ;ui.] detailed report of the condition of said bank to the Comptroller of the Currency. The Federal Reserve Board, upon the recommendation of • . . ^. _ 1 1! n.. tl... ...1.. i-Ii^c (if .ill tile Coinpi roiiei ui tiie v rrrrcnrv, :■;;;;;; .:■' bank examiners and make report thereof to Congress. The ex- pense of the examinations iiereln provided for shall be assessed ?■ -)S(; Al'ri'.NDTX ])\ the Comptroller of tiio Ciirroncy upon the hanks examined In proportion to assets or resources held hy the banks upon the dates of examination of the various banks. In addition to the examinations njade and conducted bv tli." Comjitroller of the Currency, every Federal reserve bank ma\, with the approval of the Federal reserve agent or the Federal Reserve Hoard, provide for special examination of member banks within its district. The expense of such examinations sliall be borne by the bank examined. Such examiiuitions shall he so conducted as to inform the Federal reserve bank of the condition of its member banks and of the lines of credit which are being extended by them. F.very I'ederal reserve bank shall at all times furnish to the Federal Reserve Board such infon-vi- tion as may be demanded concerning the condition of any mem- ber bank within the district of the said Federal reserve bank. No bank shall be subject to any visitatorial powers other than such as are authorized by law, or vested in the courts of justice or such as shall be or shall liave been exercised or di- rected by Congress, or by either House thereof or by any com- mittee of Congress or of either House duly authorized. The I'ederal Reserve Board shall, at least once each year, order an examination of each Federal reserve bank, and upon joint application of ten member banks the Federal Reserve Board shall order a special examination and report, of the con- d'tion of any F'ederal reserve bank. Sec. 22. No member bank or any ofSccr, director or employee thereof shall hereafter make any loan or grant any gratuity to any bank examiner. Any bank officer, director or employee violating this provision sludl be deemed guilty of a nusdemeanor and sliall be imprisoned not exceeding one year or fined not more thru $5,000, or both; and may be fined a further sum equal to the money so loaned or gratuity given. Any examiner accepting a loan or gratuity from any bank examined by him or from an officer, director or employee thereof slmll be deemed ,;ifT ^T n micrifi m£ioTir\i» r» T-» ,j ..1...11 i„ ^T- = n^..A T.nf i, v.-vcecciing one year or fined not more than $5,000, or both; and may be fined a further sum equal to the money so loaned or gratuity V APPFADIX 587 :,ivcn : and slmll forever Hicrcafter he disqualiflid from lioldinf? (.tiice as a natioiial-haiik examiner. No nalioiial-baiik examiner .hall perform any • 'ur service for com})ensation wliile holding? -.lull office for any l-ank or otliei r, tlireetor, or tiniiluyve thereof. Other than tlir uMial salary or director's fre paid to any oHicer, director or einphiyie of a memlier hank and other than .1 reasonahle f( e paid by said bank to sncli officer, director or .inployce for services rendered to such bank, no officer, director, nnployee or attorney of a member bank shall be a beneficiary or receive directly or indirectly, any fee, commission, ■j.-ift or otiur consideration for or in coimectioii with any transaction or busi- ness of tlie bank. No examiner, public or private, shall disclose the names of borrowers or the collateral for loans of a member bank to other than the proper officers of such bank witliout first having obtained the express permission in writ in-- from the Comptroller of the Currency, or from the board of directors of such bank, except uhen ordered to do so by a court of compe- tent jurisdiction, or by direction of the Congress of the United States, or of either House thereof, or any committee of Congress or of either House duly authorized. Any person violating any provision of this section shall be punished by a fine of not ex- ceeding $.5,000 or by Imprisonment not exceeding one yea--, or both. Except as provided in existing laws, this provision sliall not take effect until sixty days after the passage of this Act. Sec. 23. The stockholders of every national banking associa- tion shall be held individually re>p(msii)le For all contracts, debts and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to th.- amount invented in sucli stock. The stockl>olders In any ^na- tional banking association who shall liave transferred tlu ir shares or registered the transfer tliereof within sixty days next before the date of tlie failure of such association to meet its obligations, or witli knowledge of such impending failure, shall , Til. .1. !.„..*.... ;r fl,o^- liwl innrle no such transfer, ne IKluie lo ua: ^:lIl:!-■ v.-wtv:;-. ;•- to the extent that the sul)se(iuent trruisferee fails to meet such liability; but this i.rovlslon shall not be construed to affe.i in. I ;s8 AIM'KXDIX ■^u^y wav any recourse wlm.I, >uc-h .han.l.ol.I.Ts nu-^Iil ..llarui. i.ave a^au.st tl.o.o in uhu.e num.. .ucl. .hare, are reyi.tercd .t tiie time of sucJi failure. an T.OAXS OX FARM I.AXDS. .^Kr. 21. Any national hanklnn. association not slt^iated '"n antral n-serve eity n.av n,ake ioans MHaired hv improved an. >i'Kneun,l.ered farn. land, situat.-d uithin its ^Federal nserv. 'I'.^tneU hut no suel, loan ^hall !„■ „,ad. for a lon^a-r tin,e tha. hve years nor for an amount cxeeedin^r fifty ,,.,- „„tun. of tl,,- -•tUHl value of the property oflVnd as seeuntv. Any suei, ;ank n.ay n,ake s. ■], loans in an a^^.-e^ate su.n ..,ual In t^wentv- "ve per eentnn> of it> capital and surplus or to one-tl.ird of i^ "-ne deposds an.I m,..!, hanks ,nay continue h.uvafter as hereto- '"•;;■ t*' >-<<'^'>ve tinu. d. po>Its and to pay Inl.rest on tl... same 11k. Federal Ucsc-vc J{oa,-d s!,all have powc,- f.-on, ^in,.. to nnetoaddtothe h\t -I' .itics In u Inch national hank, shall m.t '"' P"n.nttcd to n>akc loan, secured upon real estate in the n.anner dc^crihed in this >eetion. FOIUIC.X Ill!A\THi:S. S|.:r 05. Any national hankinn- a»ociafion possossmn- a can- ;'''';:'V'"r^"'"^^-'"»"''"»<>-- — v 01.. application. iU. ""■,'■"■'■;."""■'■"' "••"■''• "' ^"''' '-"litions and nnd,,- M.eh n.n.„latH,ns as n.ay he p.v.c.lhed hv the saal hoard, for ""' P'"T'"- of securing- authority to csfahlisl, hranclu. in for- n-n conr.fru.s or .lep.ndencies of the Fnit,,! St ,t.s for the l.Ttherance „f fl,, forein,, connnerce of the I-nited States and to .xt. „ re.pnred to do so. as fi.cal a^n nts of the Fnited States Sneh application shall .pcclfv. In adddion lo ,|„. „an,e and •■■■;'"'"' '" ""• I'ankin^. association (ilin. it. the pi,,,, o,- pl,ce, where the hanking, operations propo..! are ,o I .,r,i,d on ;""'»»'-"'>'o"nt of capital >ct asale for the conduct of it. for,.l.,n husinoss. The Fed.r.d !{...,.rve !» = -.,= =■.{ .]...!! !,,.... .. . . "^ I"-"V" ..r fo reject s„ch application if. in lts".iud!^„!.„t! tl^ ArriADix )8!) amount of capital proposed to be .sot aside for tlie conduct of loreio-n business is inadeciuate, or if for other reasons the grant- inc of such apphcation is deemed iiiexf)ecHent. Kverv national l)aiiking a-MJciation which shall receive au- horitv to establish foreiy;n hranclus shall he required at all tiiiio to furnish information concerning the; conditiori of such hranches to the ('om|)troi!er of the Currency upon demand, and the I'eder.il Reserve IJoard may order --pecial exiuninations of the said foreign branches at sucii time or tlmcN a- it may deem h'st. I'.verv --uch national banking association shall conduct the accounts of each foreign branch independently of llu' ac- counts of other for( ign branches established by it and of its home office, and shall at the end of each fiscal period transfer to its general ledger the profit or loss accruing at each branch as a sejiarate item. Sic. 'id All provisions of law inconsistent with or super- seded by any of the provisions of this Act are to that extent and to that exteid oidy hereby repealed: rror'tdid. Nothing in this Act contained shall be construed to repeal \\w parity provi-lon or provisions ccntaln((l In an \et approved March fourt(enlh. nineteen hundred, ( ntitled " An Acl to define and (i\ the -tandard of value, to maintain the parity of all form> of Money issued or coined !)y the I'nlted Stal-, to refund il,e public debt, and for other pur{)OMS." and the Secretary of the TreaMiry may f.u- the purpose of nialnlalning such parity ..nd to siniigthen the gold reserve, borrow gold on I he security of I 'nlteii States bonds authorized i)v seillon two of the Act last referrtd to or for one- \ear "-old notes bearing,- interest at a rale of not to e\<'eed three per ceiiMnn j/er aiuunn, or sell Ihe same if necissary to obtaui <'oIil. When til.' funds of h. Treasurv on h uid .justify, he may purdiase and retire such outst nullng bonds mk! imfes, Si;c. ;^7. 'I'h.' provisions of th.e Act of M iv thlrlutli, nineteen hundred and i.h esplns liy limitation under tlie lenns of sneli Act on the Ihlrtleth (biv of dune, inne- teen h mdivd and f.airtien. ar( hereby txt-nled to .luiu- thir- i 590 ArriADix tictl 1, run ctccn lu'iidrcd aiui iittccn, ami sections Ircil a I 1(1 Hftv-tluTi.', filtv-otu' llUIH Ircd and seven fift ty-t v-or.c liuii- wo. such sections read prior to May tiiirtieth, iiiii.teen hundred ami ei<;ht. vui),ject to sucli amendments or modifications as are j)rescrii)ed in tliis Act: Pro- :;'(/( y/, iKKiCxi't; That section nine of the Act first referred to in this section is hereby amended so a- to cliange the tax rates fixed in said Act by making the portion applicable thereto read as follows : National bankinij a' lie- \i^((I Statute^ i> her(l)e aimiidid and rei iiaeted to r^ id as lol- lows: Any association f(nii.( d uiuKr this title may, !> tin vote of shareholders ouuin^ fwot birds f its capital stock, reduce its (;i,Mtal to aiiv sum not below the .•iinount re(piir<'d by il-is title to aiithcn/e the f()rmatl oiiKtandm^ circii lalioii. nor shill aiiv reduction be made until the aniouii' of the proposed reduclion has been n ported In the Compt roller of the Currencv and such reciuction has In i n approved by the said Comptroller of the Currency and by tht I'ediral Reserve Hoard, or by till' ory;anvation coniinittcc pending the organization of the I'ederal liesi'rve Hoard. . r>£C. !^'9. If anv ( iause, s(-ntrncr, pfiragrapli or part of tiii- Act shall for anv rea-on be adjudMid by anv enurt of ilo of inonc.v. 11. Act, Aldrioh-Vrocland. '$7.). 473. BIanf 1S.")I). U.V General Baiikiiij;, 110. Lcfjai tender, (iO. N.itional Bank (see Natinnal Bank Act). :<(!.">. Of IHOH (Canada;. \7i. Of liXIO, Vroducts as money, 38. Aldricii-Vrccland Ail. i.">f). Arl.ilrat;.-. l.-,l \:,i. Army BilU, 171 I7.V .\sset ciirren .\sset'i, ciincealcd, i(\\ Audit, -.harelididiT.'. i:!I. t3fi. B Bank (or Banks), Articlps of .\.ssoeial mn df lir^t char- tered. 177. Audits. 131. Capital, 4.-.I. Capital anrl credit. 2*3. Capital stiM k of, '271. Cashier. •, 3.">0, Foreign Di'partment of, 1 i3. Free Banking Act of 18.>0, 41, V Functions m making jtayment, 113 lU. (ioverninent, the, 482 -.")i')2. Incorporation of, 410. Inspe( tion. Internal, 431. Liability of, in <<>llecting, 2!)0. Liai)ilily of stockholders, 272. Loans (see Loans). Loans to directors, 40,5. Mergers and amalgatnalions, 4,56. Note feller. 2!».i. Number of, to population, 4t2. Officers of. 2!>3-2!)t. Of small capital, 470. Operation of. 241. Organi7.atini\ of. 280 Organi^.alion nf n ('.uMdian, 43L Origin of great chartered, 176. Paying teller, 294. I'rivrtte. 280. I'rofits of ('anaiiiaii, t.53. Provisions of the early bank charter! 410. 592 INDEX !):j }7-3t6. ?, 306. 31-247. 113- 178. n:!. ■)0, n,v yment, H. , i7i. ions, 456. n. Hi. lifin, 431. 1, 17G. ank chartors. Hank (or Bark!f) — (rnnlinue(1) Reserves composed of (our elements, 4i6. Reserves fixed liv each bank, 424. Savings (see Savings Banks). Second I'nited States, 353. Settlement of accounts between, 116. Shareholders' audit, 431, 436. State ownership of, 409. Stockholders of, 286. Surplus, 449. Taxing the. 486. Trust companies, 467. Underwriting and promotion of cor- porations, 463. V. S. Treasury in relation to, 390-394. Wall Street's relation to. 381-389. Rank .^ct of 1844, 308. Bank circulation, expansion of, 376. Bank Credit, .Advantages of, 251-253. Deposit. 203-208. Bankers, Privileges of, 239-241. Requisite qualities, 315. Responsibility of, 245 2 17. Banking, Branch I)ank system, 417. Branch banks and the local commu- nity, 439. Call loans, 427. rommercial, 195 (see Commercial banking). Commercial letters of creclit in C.in- ada, 477. Concentration of reserves in liramh banks. Ul. Conilitiiins of note issue. 41*^. Karly characteristics, 317. KtTccI of union of I'pper and I.mver Canada, 414. Knclisli customs. 139. I'inancing the crops, 473. I'r.tnce, 401-402. Historical peri(Mls, 318. 10. Interest chari.'es in the West, 468. Inti rnal bank inspection, 431. Money trust of Canadian banks, 456. New features added to, 1820-1830, 113. Origin in Canada, 409. Security of note issues, 423. Shareholders' audit, 431, 436. State, .35(i. Substructure of Canadian banking system, 410. Banking Systems, European, 395—408. National, 365-370. State experiments with, 362-364. Bank mergers and amalgamations, 456. Bank-note Issms, Benefits of, 448. Criticism of, 446. Profits on. 447. Bank of Kngland, .\ct of 1S44, 398. Character of note, 390. Control over gold supply, 129. History. 395-399. Management of, 400. Origin, 395. Relation to Government. 397. Bank of France, 130 Branches of, Kll 406. ( iirrciicy of. 40,1. System of. lOt- Kl6. Bank of Cicrniai .-, fiovcrnment relation to, 106. Svslem of, 107. .ifTcctcd 1 >y. Bank notes, prici 215. Bank reserve. 207. Bank reserves, 78. Dominion notes as, 189. Bank Sfatiinent, ( 'ombint il. 260. Double entry system in, 262-405. Liabilities in, 271-279. Resourci'S in, 2(!0- 270. s.;....,!...j ?!:?-..•! •:•. J?.''. '?7.' Iniled States bonds in, 206, ,-.ni INDEX !?,ink System, l$(m.l Deposit, 359. Free, :i(ll-.S(U. New York. ;!,)!). Safely fliuil, 3.")!). SiilTolk, 357-358. Barter, Excliange by, li. Influenro im industry, 12. Reaver skins as money, 37. Bimetallism, 153-l(>5. A. ( ci-operative iredit soci. Kinds of. 19.3. Letters of. 14.5-146. Liquidation of. 200. Necessity of. 426. Non-circulating, 211. Operation of. 16. Prices afTected by. i 1 1-219. Settlement of balances by use of. 122. Sources of information, 337-3.39. Speculation and. 216-217. I'se in industry. 194. I'scfulncss in I'xchange, 14. Credit .\gencies, 339. Cre British Government and Canaiiian. 178. Canadian in second quarter of 19th century, ISi. Cause of de])reciatei-i- Doi)()sit Curri'iicy). Deposit rurrtiicy in Canada, H3. Fractional. I(i9. Halifax, His. Mc(lia of i'\,'o. 15. Hi'lalion to raiiila!, ii. Rosnlts of roform. 170. Soa onal (icmaiuN for, .'i73. Shipments of. 1 17. Standard, of Colony. 100. Iniforni. in Canada, \'.H. York, KiS. Cut eoins as fractional rurr- iicy, 160. Debt, Demand. iiO. Government. ii7-iiO. Provisions for reliriiif,', 230. Deferre03. I)e|)reciation of currency, IS. Desire, defined, 71. Directors, loans to hank, 105. Discounts. 201. Divisihilily. .-i re(|ui-iti' of money, 41. I)i\isi.in of Lal)or, business the rcs\ill of, .">, FfTect on demand for money, 7t. Dollar, defined, 20. Domestic Exchanp\ 112-122. Dominion Notes, .\s hank reserves, ISO. Legislation coneerninR, 100. E Economic Fore<"s, (-umulalive effect of, 03. Prices governed hy. 107-109. Value a register of, 27. Economic goods, kinds of, IS, Economic situation in Canada afte Con(|Uesl. KiO. Economics, H INDEX o97 8. iiiiiicv, 41. inry, 7t. ii. !)0. lOD. IS, "aiiaila aftiT ni. .-.3. .standard of ii>, 3!).)-in8. r, 17;-17J. _ . 1 l-^O i.dia (.f, UiH K\(lianj,'«- — ironl! lined) I'.aily iiifdiiiiiis of, 11. l''iirrit.Mi. I'ii-lji IM''' Foreign Kx- (■li.int:r,). (itrmaii and I'nncli, 119-151. (iovcrnminl dilji-nturc.-, as a mtxlium uf, IHl. M,ll.od> of. 11. Money a fm tor in, 1.'?. New York, lUllJ. Value of. 7. Uiili Cnited Kingdom, ISO. lAehanp'aliility, utility of money de- pendent on, i\i. Exchan^'e utility, tij. Falkner price tahl.s lOO-lO-l. Feudal I'eriod, metals in, lJ-1. Fiat money, defined, iiO. Finance I'ill-i, Dclineil, 110. I'njlit on, U1-U.3. I'iuan'ial hanks, plan for, .'5S8. I'liiancial situation after Conque-jl. 1G7. riuancinj; the crops, 47:5. Fnreiun hranch l)anks, IJS. Foreign coins in ("anada, lSl-182. Foreign commerce, 131-13i. Foreign Kxchangc, Dealer in. Hi. I',nuli-li Treasury l)ill>, 174. (iold point, U7-US. Investment hnying of, 147. Market articles, Ki.V 13G. (^uotalions, li:>. .■^peciil.ilion in, l;i7. Varieties. l:iS. Fractional currency, U>1>. Hons as, 109. Cut coins as, ICi). France. Hanking in, 401. Iliuk of, 40^ (see Hank of France). l fee hanks, 41.">. Free Silver Party, 30. Gait, \. T., 18G. (ialt's plan, ISO. fiarni>hment, 3;io. Cicneral Hanking .\ct. Basis uf, 410. Points of difference from early thiii- ters, Mi. Provisions of, 410. Similarity to cliarlers of three original hanks, 410. Germany, Imperial Hank of, 400-408. Gold, Credit an inlluence on use of, li)i). Defects as .standard of deferred pay- ment, 04. Demand for, ~.'>. Good (lualities a- money, 44. Market for, IM. New, S7-SS. Objections to u>e as money, 15. Premium on, 81. Price-raising effect of, 87. Shipments, 131. Standard of value, 29. Supply of, 83-85, 80. ^Vorlil's stock of, \o3. Gold certiticates, iiO. Gold (joint, Maximuni, li7. Minimum, H7. Gold standard, I'ni! 1 States adoption of, 01. Government credit money (st-e Credit Money 1 Government . Government savings hanks, 4"Jj. Goods, Consumption, 18. Prcxluction, 18. Cireenijacks, iiii. Greshum's Law, ,10 r>l. 598 INDEX p I If n Hiilifax currency, 1(!S, 170, ISG. ILimilloii, Ali'\;ui(i<'r, '>C>, J7, JH, 17G. HiiK'ks, Sir FrancLs, IS'J. KcMilt of legislation, 191. Hoarding', Decline of, 77. Go\erniuent, 7S. I Imperial Bank (.M-e Hank of Germany). Income, sjiveil, it. Income.s, Money, iii. Sources of, i'i. Indu.strial .system, relation of money and banking,' to, 10. Industries, j)roductive, i'M. Industry, Credit influences on, i\9. Integration, 10. Inelasticity, present currency, 375. Inflation, early attempts, 100. Inspection, Internal bank, 4;il. Interest charfjcs in the West, 108. Interest on deposits, 471. Investing, 100. Investment, Detinetl, H. Methods of, i-l. Real, ^5. Jackson, bank opposed by, 3j5. Johnson, J. v., -US. Kiting. 307. Labor, Division of, ,■;, i). Ideal lin i^ion of, 5, La'iii I'nion, UiO. Legal tender, .Vi-.'jt). Hasis of legal tender issues iu the Diimini'ii, Sio. InCanad . .)-2. Legal-tender .\cts, of 180^-1803, 00. Legal-lender Laws, Constitutionality of, (JO. EfTect of, (i(i. Legislators, mistakes of early, 51. Letters of Crciia, travelers, 145-146. Loan clerk, responsibilities of, 385. Loans, Call, 'M6. Capital, 318. Cash, ^54. Classified, 315-320. Collateral, 324 (see Collateral Loans). Credit, 254. Demand, 321. In bank sla'. nient, 264. Industrial, 31U 318. Investment, 315. Mortgage, 319. To directors, 405. To farmers, 429. London settlement, 136. M Margin, defined, 33. Marginal utility, .32, 33. Market, gold, 129. Medium of Exchange, requirements of, 40-43. Merchandi.se, collat>:ppl.V of. Si, 85. 1 nited Slates varieties of, 82. I'tilily of, 13,71. \'arielies of, 7i-73. Muuey and Banking, relation to indus- trial system, 10. Moiu-y and ("redit, I'uiilitate exchange, 17. Rrpresentatives of wealth, IC. Muncy trust, Canadian banks in, 450. Mortgages, 196. N N.i.h, W. .\., quoted, 331. Nilional Bank Act, 305. I'.arly history of, 300. Sununary of, 307-309. \ ilional bank notes, il3. National banking system. Lack uf unity in, 377. I'resent condition-- of, 371-380. N itional Banks, I lasses necessary, 4i7. Dclined, iSO. Technical powers of, 308. \-,\ York Exchange, 1 U, 118. \ w York Sttxk Exchange, 383. \ole, ( ullateral, ^^i'^. •ludgnicnt, 3i3. \..!,- broker, 341. Note Issues, Conditions of, 419. Dominion, 189. Government, 180, iSi. Provincial, 187-189. Reserve for (iuvernment, 48i. Security of, ii'-i- Notes, circulating, 3()9-370. o Organization of a Canadian bank, 431. Overcapitalization, ■i'i. Overdrafts, H\3. Over-rating of coins, 170-171. Panic, Rich man's, 380. Warnings of 1907, 3. Paper standard, 00-01. Placer mining, 100. Platinum as money, 45. Political Economy, defined, 3. Population, effect on demand for money, 73. Postal savings banks, 378, 490. Pound sterling, Ho- Premium, gold, 81. Price, Changes, 91-94. Detined, 09. Prices, Civil War, 104. Credit an influence on, 211-219. Uepentici't upon money market, 70. Economic forces governing, 107-109. Reserves in rci ' ion to, 3S(i. Speculation an influence on, 210-217. Theory of, 95-111. Price tables, 97-107. Comparison, 105. Falkner, 100. Foreign, 100. Weigiiting of, a9. Private banks, 280 V (inn INDEX I'licidiiu. coiiwiuc uttrihutciJ In, Hi. I'dslal liaiiks V.)J. I'mducliiiii, Hy iliaiif,'!' of o\vnersliip, C. {'o-()|)irativc sy>t(M!i, IS). D.fiiud, -,. Miitrcpn-ucur sy^li'iu, 19. I'nxliiilivi' industries, i.'il. IV.ifit, .Iffiiied, i7. Profits of C.iiuidian banks, 453. FroptTty, D.'fined, 8. Iiisi'curity of, 7C. PvramidiiiL', 380. R Ratio, silver to >,'old, ."lO (iO. Receipts, \vareliuiJ.ie (see Warehouse Reeeiplsj. Reiilishank, 4(>'j (see P luk of (ier- inaiiy). He.-e.ve. .Aiiioiint ner sary, t-V. Rank, -207. Melh.:)ils itf inereasiiij,', iiJ7. National liank, ;!7(). Secondary, i5S. I nrelialjility of bonds as, xa9. Reserves, Call loans, Vi7. Central avM, 4-20. Coneentralinii in branch hanks, 4H. Depletion of, ;!T4. Fixed by each bank, 4ii4. Four elements of, l-2(i. Gold, for (lovernnient note i»ues, 4S-^. Investment securities, 4:^8. Loans to manufacturers, wholesalers, and farmers. 4i28. I'rids in relation to, 386. RedeposilinK. 380-387. Resourct s, alterations in value of, iGS. Ridirely, opinion of ( oiuptroiler, i'.H. Rourke, J. !■: , too. s .Safety deposit vaults, 304. Saving, IOi>. Suvinjis bank, iH3. Savings Ijanks, 49j. Postal, 378. Present conditiotis of, ;'>77. Secretary of Treasury, K\ped!cn,s of, 393. Re>p., liability of, 390. Requir'/mcnts of, 'Mi. Securities, Dealers in, 3Si, Market in Cnited States, 381. Indigested, Ma. Selling, Forced, 9fi. Set-otf, 31^. 313. SettleuKnt, London, 130. Shareiiohlcrs' audit. 431, 43C. Shern\an .\ct of !Si)(), 'Oi. Shipment ~. f,-o]d, 131. Silver, Bland-.\!!ison .\, ( of 1S78, \(ri. Rriiisii iiiiiia and c oinage of, 103. Uemonetization by Iniled States, 161. E(Te( t of .\ineriean, 1.^5. (iiiod (pialitii s as money, 44. Latin I iiioi:, 100. Objeitions to. 4.5. Sherman .\(l, 1890, IGi. Silver [,'art\ , 1(0. Short sale,, '.>.;. Shorts, si|Uci./ing, 9.». Shortt. Dr. Adam. 410. Single stand.inl, l.iS iOO. Spcculalioii, credit an influenee on, i\i'' Slaliilil\. |-e(|U!site of money, 4i. Standard of value, .\l)preciating. 08. Double, 49, .5^-53. Gold in Lnited States, 6L Melailic money as. 48. Paper. 00-01. State Hanks, d<'iiu( d, -^80. V iM)i:x tiOl Stiitrmont. R;ink, '2(;0-iJ70 (sec Ikii'k J^'Htomcnt). Stiitciiu'iiK III till' Ciovrriiiiii'iil, H'l' State (i\vtirr~lii|) of liaiik--. 10I>. StiH-k K.\( Ikiiij,'!-, New York, .'583. Str l),niks throiigli. 1 IT. SiiiTdlk Hank S.v.strni. ;i.i7-:i.>S. Supply, money, Hi, s:>. Surplus, bank, 27;i-27.'5. >iirplM> or rest fiitu!-. oxcrssivo, -M9. T Taxing li.-ink-. ISCi. Taxipf; circiilaliori, iSH. Toliacfo as mmicy, iiH. Td'irists, ('(Tfil 1111 fdi-ci^ii lAilMiip', l:U. Trailc, infliu'iii-c Treasury. Secrel.iry ft (»•>• Scenl.i ry nf TreaMiry) I'liitci ^lalrs (><■.■ [ . S. Treasury). Tr:i~t, Canadian l)anks in lanuey, i'Ai. Trust Companies, \n(l hank.s 407. Defineil, iHi. D.'po its of, iS.'i. Trust De])artuionl of, iJ83. Trulls, < Orporate. iSl. !iidivi(iual, 284. u rmlerwrii mu, 281. .Vnd promoliou of corpnvalions, 40.1. I'tiiformity, .'i requisile of money, 11. I'nited States, I'irsI Hank of, r!.50-:!.-)2. Ilisiory of eoinajje, .)(i-(iI5. Second !lank of, ,'{,53. Tnited Stales ')ont an ideal standard of, -2!). IViee distingnislie(l from, is. I'riiiiilive ideas of. :>S Sta!)ilit\ of, ■ requisite of money, 1.' t.i. Store of, 7.'). rtllily theory of. .11. Voliuf; power of shareholders, 412. W \\ aiiipnm. Dl'fects.. i~2. I se as niipiie.v. .'ifl. Wall Street, banks in n lation to, .S81- ;!S!». Warehouse receipts, Law of, ;i.'i'>. Loans on, 3.'5;j. Penalty for illeu'.'il u^i'. :!:!."). IVoteelioli lo holders of, AM. ."-afefXiLirdini; of, :i:!l. Wealth. Hanking' .:n iu-litution in prodnrtinn of. 10. Classid.'d, 18. Definition of. 1. 8. Money an instrument in production of. !(». Wevhurn Seeiirilv H.ank. '70. York cTirrenrv, 1(!8. 171.